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The success of REITs this year in raising capital on virtually every front is unparalleled by any other investor group, and it’s something of a surprise as well. Through August, REITs had raised nearly $19b in new equity and another $6b in unsecured debt. In addition, many REITs have been adding to or funding new credit lines. And to top it off, REITs are the largest net sellers so far in 2009, selling $6.1b of assets against just $1.3b of acquisitions.

Other REITs have turned to foreign investors for capital. Cedar Shopping Centers acquired a property in a JV with the UK’s Prime Commercial Properties, while UDR has recently made a splash with a $450m JV with a Kuwaiti fund for prime US apartment acquisitions.

In addition, REITs have significantly reduced debt levels from close to 70% to about 61% on average, according to Commercial Real Estate Direct, with some companies in far better position than that.

All of that would seem to suggest that these relatively “reliquified” companies are now in position to lead the way out of the deal drought, as they did in the early and mid 1990s. In fact, the market is now counting on REITs to be big buyers going forward.

Not yet. To date, REITs have continued in the role of net sellers that they began in 2006. After acquiring 16% of all deals on average from 2000-2008, REITs this year have made up just 5% of the acquisitions while accounting for 22% of all dispositions.

Where REITs have been leading the way in acquisitions is in the medical office building niche. Companies such as Healthcare Realty Trust, Senior Housing and Nationwide Health Properties have accounted for more than 40% of acquisitions in the sector. REITs such as Acadia and Cedar have also been active in strip center acquisitions. Mortgage REITs such as iStar and Gramercy have also made deals after dancing on the brink of disaster (with 15 mortgage REITs in registration or already out of the IPO gate and aiming to raise a total of $6.6b, this sector is on the upswing). And while in the past, REITs bought land for development, it is likely that most buys over the near and medium term will be of existing properties. Still, there have been three REIT land deals this year totaling $42m, including one niche player, Digital Realty Trust.

One reason for the slow investment pace: REITs now have an average implied cap rate of 8.5%, according to Green Street Advisors. While that’s better than it was, and closer to the average cap rates for most property types, it is still clearly out of the comfort zone for many of today’s deals.

REITs have certainly demonstrated enviable fund-raising capabilities. But they will still face serious competition from overseas buyers as well as private investors as assets – especially distressed assets - become available, most likely in a slow parade around the market square. Whether the REITs will be able to put their capital into action and re-emerge as net buyers deserves watching.

Most Active REITs in 2009 (through August)

Data subject to future revision; based on properties & portfolios $5 mil and greater.
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