Never mind California dreamin', the harsh reality for REITs was reflected in the sombre mood at NAREIT's annual conference. But the meeting noted some bright lights, as Jon Peterson reports

The sentiment among delegates at the National Association of Real Estate Investment Trusts (NAREIT) annual convention in San Diego last November reflected what REITs have endured recently - a 40% drop in share prices.

NAREIT's new chair for 2009, Connie Moore, who is also president and chief executive officer of BRE Properties, said: "The next period of time is going to be challenging for all of us in the industry. There is a great deal of fear and dislocation in the marketplace. One of the major factors for us going forward is going to be the significant de-leveraging of the industry."

There are some REITs in the industry that are fairly upbeat. David Simon, chairman of Simon Property Group, said: "There is panic all around us but I'm not one that is ready to panic. We still have tenants in our retail properties and will continue to have them in the future. The amount of customer traffic going through our properties is still OK."

REITs are experiencing good performance in some markets and less so in others. One of these is Maguire Properties. It owns many office building assets in downtown Los Angeles that are doing well. The same cannot be said for the office building market in California's Orange County.

Conference delegate Nelson Rising is the president of the REIT. He said: "This is a very difficult time to own office buildings in Orange County. It has been hit by a double whammy with the problems of the construction industry and the sub-prime business. This has resulted in a great deal of space coming on the market and not a lot of tenants looking for new space."

The conference also looked at one of the biggest factors affecting REITs in the future which will be a lack of new debt coming into the marketplace for commercial real estate. Mark Streeter is a managing director with JP Morgan Securities. He said: "Over the next two years there is a going to be $35bn (€26bn) of debt that is going to mature in the REIT universe. The question is, who will fill in the gap? There are now no sources of capital for new lending for the industry."

The traditional sources of capital have now all withdrawn from the market. These include banks, life companies and pension funds and there is no real indication when any of these sources will be coming back into the market. One of the reasons for this is that these lending sources are having their own financial difficulties.

Life companies, for example, lost 40% of their market cap last November. Pension funds are now dealing with falling total plan asset values as the returns on their equity and stock market portfolios have dropped significantly. Banks have no confidence in the market for the near future.

Streeter said: "It's my opinion the REIT industry will have a tough time in 2009 and some light at the end of the tunnel for 2010." There was a general feeling at the conference that one property type that is attracting some new financing capital is apartments. This is because Fannie Mae and Freddie Mac are still active in the marketplace.

One REIT that has seen this firsthand is Camden Property Trust. In the fourth quarter of 2008 it struck a debt deal with Fannie and Freddie for $380m of financing. This will sit alongside $375m of equity that it raised for an apartment investment fund at the end of 2007.

Rick Campo, chairman of Camden, said: "This shows that there is still some new lending for apartments. We feel fortunate that we can attract capital to our company, given what is going on with the rest of the industry."

Camden is not looking at investing the capital for the fund any time soon. Campo said: "We are not seeking new deals and this will likely be the case at least through the first quarter. There is still a lot of uncertainty in the market. Another factor for us is that there is a huge spread in the bid and asking price for sellers and buyers."

Up to this point Camden has only invested $15m of the capital for the fund. This was for investing in two apartment complexes in Austin, Texas. One was an acquisition and the other was a new development project.

The attendance at the NAREIT conference was affected by the financial difficulties of the industry. There were 1,000 delegates at the meeting, down by 15-20% on past meetings. Some REITs felt it was better to stay home and cut costs.

The conference did attract some companies that had not attended recently. One of these was Rothschild Realty. Managing director Pike Aloian said: "There is a good possibility that we will be making an investment with a public company in the near future. This is something that we have done in the past but have not accomplished recently. We have not been coming to any recent NAREIT meetings, but the timing was right to attend this meeting."

Rothschild will be investing in a public real estate company through its Five Arrows Realty Securities Fund V. This is a commingled fund that has raised $840m of equity and closed in July 2008. The fund has no debt component.