Martin Sinderman

The real estate industry seeks to rebuild the property and confidence that were lost

As the monumental recovery and cleanup efforts in lower Manhattan and at the Pentagon move forward, the nation has begun the uncertain path in its return to normalcy. Part of that revolves around rebuilding the property, confidence and security that was lost on Sept. 11, 2001.

For its part, real estate as a whole is among those industries most affected by the attacks. Like many other industries, real estate owners and investors are faced with more questions than answers regarding the direct impact of what happened as well as what lies ahead.

Fear of Being a Target
There is no doubt that the terrorists targeted the World Trade Center and the Pentagon for specific reasons. These symbols of U.S. economic and military strength were high-profile targets, which has many people wondering what the next target or targets might be.

As a result, will landlords have to deal with office space users that want to avoid high-profile, "trophy" buildings that could become targets for future terrorist activity? Time will tell, of course—but history suggests that won't be the case, according to Christopher Haley, director of real estate research for Baltimore-based First Union Securities Inc.

City on the Mend The september 11 terrorist attacks struck a blow to New York City’s downtown office sector and shook the foundation of the world’s financial center.

Although not on the magnitude of the recent World Trade Center and Pentagon attacks, Haley points to earthquakes in Los Angeles in 1994 and San Francisco in 1989, large-scale building fires in Minneapolis, Detroit and Philadelphia, and the 1993 garage bombing of the World Trade Center. "The proclivity of customers [office tenants] to continue to locate in trophy buildings or skyscrapers is certainly an issue," Haley says. "But, our experience with these earthquakes, fires and other disasters suggests that they will generally still want to get back into these higher-quality buildings."

That sentiment was echoed in a Salomon Smith Barney conference call shortly after the attacks. During the call, Samuel Zell, chairman of three publicly traded REITs, was asked if the attacks and ongoing threats would discourage his companies from pursuing downtown skyscrapers.

"We believe in the safety of this country. We believe that you're going to get superior returns by owning superior quality properties," according to Zell. "I think the idea that people are going to move into secondary locations and secondary buildings because of this is foolish and will not be supported by reality."

Given the proximity to the events and its high-profile status, the New York City office market would seem the most likely sector to suffer a defection of occupants—if there was to be one. However, most analysts expect any initial defections in New York to be short-lived.

"People will come back," says Timothy Welch, executive managing director at New York-based Cushman & Wakefield Inc. "New York City is the financial capital of the world. New York is where the action is, and people want to be here. Finance is a very transactional business, where the ability of people to meet face to face is key."

Security Measures Tighten
Regardless of where tenants choose to be located, security will be at the top of their priority list. How dramatic and far-reaching the changes in security measures will be is another question that is only beginning to be answered. The sector under the most immediate scrutiny regarding security has been the office market.

A new focus on security may negatively impact the profitability of some office buildings. Security technology and personnel cost money, and someone has to pay for it, Haley says.

Additional security costs in the post-September 11 marketplace, estimated by some industry analysts to be in the 5 percent to 10 percent range, will probably be shared by both tenants and landlords, Haley says. "That makes the margin of profitability in the office business a little more volatile, particularly for buildings located in urban areas."

However, security concerns are by no means limited to office buildings or skyscrapers. Tourist attractions, malls, sporting venues, hotels or any other place where large numbers of people gather have to be considered possible targets and appropriate security measures taken as such.

Retail Facing Tough Market
In the retail property sector, those concerns have certainly been expressed. "Major centers for people to gather, such as regional malls, may become less popular as they may be considered potential targets of terrorism," according to a report from REIT analysts at Salomon Smith Barney. "We think that if this tragedy remains an isolated instance, this scenario is remote."

Security measures have been tightened at shopping centers throughout the country. "We have about 50 security people at every mall. We also have a police substation that opens onto the mall as a storefront," according to Laurence Siegel, chairman and CEO of The Mills Corporation. "Most of our malls are newer malls; as such, they have a lot of new technology. The trick is to [increase security] and not let the customer see it."

Lodging Struggles Immediate
No sector has been more dramatically affected than the lodging industry. Lingering concerns over air travel and reduced spending on business travel will not be issues that are resolved any time soon.

"The impact will be much worse than during the Gulf War due to concerns over personal safety," says Eun-Jee Park, vice president and senior analyst of Moody's Investors Service's Structured Finance Group. "It will be a minimum of one full year before demand [at hotels] returns to normal."

Starwood Hotels & Resorts is one of many hotel operators that has instituted cost-cutting measures in an attempt to preserve liquidity and maximize cash flow. Among the steps being taken are cuts in staffing, closing floors or wings to save energy costs, restricted dining hours and menu, and the combining of front desk and concierge functions. However, security is one area that has not been pared down. In fact, Starwood has doubled its security costs and added around-the-clock security in all lobby and garage areas.

But there are signs that the worst may have already past. Occupancy levels plummeted the week following the attacks but have been slowly increasing ever since. "We experienced an occupancy low on September 16, similar to most hotel companies," says Thomas J. Corcoran, Jr., president and CEO of FelCor Lodging Trust Incorporated. "Since that time, hotel occupancies have begun to rebound on a daily basis and trends continue to be encouraging."

Analysts agree that the longer and deeper the economic downturn becomes, the harsher the impact will be on publicly traded real estate companies.

Real Estate Stocks Offer Shelter
The impact of the events of September 11 in helping to turn what was a mere economic downturn into a mild recession was almost immediate. But as the stock market faces turbulent times, real estate stocks have continued to offer investors some protection. "No structural or fundamental causes have emerged to undermine the long-term favorable potential of real estate investments," according to a research report from Marcus & Millichap real estate investment brokerage.

At least for the short term, REIT investors may continue to be somewhat cushioned from the impact of the attacks. "The consistent cash flow that real estate stocks offer, based on contractual leases, can buffer the downside for the investor," First Union's Haley says.

Lee Schalop, real estate equity research analyst with Banc of America Securities LLC, remains positive regarding real estate stock fundamentals. "This is because real estate stocks are still cheap despite the good performance over the past 21 months, and because underlying supply-demand fundamentals remain healthy despite the slowdown in the economy," Schalop says.

Analysts agree that the longer and deeper the economic downturn becomes, the harsher the impact will be on publicly traded real estate companies. Lisa Sarajian, managing director at Standard & Poor's, adds that since REIT earnings are lagging indicators it may be some time before the impact is shown.

So despite the challenges that lie ahead and the questions that remain to be answered, the fundamentals that made real estate stocks solid investments prior to September 11 will continue to make them attractive to investors.

Martin Sinderman is an Atlanta-based freelance writer specializing in real estate.

Like many individuals and companies in the U.S., the first reaction by many real estate companies following the tragic events was "what can we do to help?" Numerous real estate companies and their employees donated money, food, supplies, blood and other items.

Given the dire space needs not only for displaced tenants but for rescue workers and others at the scene, many companies opened their doors. Mack-Cali Realty Corporation, AMB Property Corporation, Reckson Associates Realty Corporation, Host Marriott Corporation and Starwood Hotels & Resorts Worldwide are among those companies that have volunteered space.

Many retail and apartment operators have been collecting money and donations from their shoppers and tenants. Among those companies that have set up donation centers are Apartment Investment and Management Company, Archstone Communities, CBL & Associates, Crown American Realty Trust, General Growth Properties, Kimco Realty Corporation, The Macerich Company, The Rouse Company, Simon Property Group, Taubman Centers, Tanger Factory Outlets and Westfield America.

Publicly traded real estate companies and their employees have pledged millions of dollars in donations. The list of companies donating funds includes AMLI Residential Properties Trust, AMB Property Corporation, Archstone Communities, Associated Estates Realty Corporation, Boston Properties, Inc., Equity Office Properties Trust, Equity Residential Properties Trust, Forest City Enterprises, Glimcher Realty Trust, Highwoods Properties, Kimco Realty Corporation, Parkway Properties, Plum Creek Timber Company, Reckson Associates, Simon Property Group, SL Green Realty Corporation, Starwood Hotels & Resorts, Tanger Factory Outlets and W.P. Carey & Company.

This is not a complete list and only a sampling of the goodwill and generosity shown by REITs and publicly traded real estate companies. For more details on the actions the industry has taken to help the relief efforts, log on to www.nareit.com.