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KBW: Austin is Best Overall Market for CRE, Detroit Scrapes Bottom

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Commercial real estate if flourishing in the Austin metro statistical area (MSA) according to Keefe, Bruyette & Woods (KBW), a financial firm that ranked the MSA at the top of three out of six categories in its Equity REITS/Commercial Real Estate MSA Tracker for the second quarter. The report, released today, said Austin is the No. 1 hotspot in the multifamily property sector, the retail property sector and has the best overall economic conditions. The Detroit MSA, on the other hand, consistently underperformed ranking fourth from last in the industrial property sector, second to last in both the multifamily property sector and the economic conditions evaluation, and dead last in the office property sector. MSAs with real estate investment trust (REIT) risk exposure exceeding 10% of properties are ranked by KBW in the best and worst markets. With regard to office property exposure, Richmond, Miami, St. Louis, Portland and Nashville are ranked as the best markets. KBW said Richmond reclaimed the the top spot due to positive rent growth outlook and a 5% net absorption of total office inventory. Detroit, Dallas, Indianapolis, San Jose and Denver rounded out the bottom of the ranking. The bottom three MSAs had high vacancy rates -- 31%, 28%, 20%, 27% and 24%, respectively -- with future outlook "not much better." (MSAs are listed in order starting with the best/worst) The Raleigh-Durham MSA jumped to No. 8 from No. 24 compared to Q110, and New York climbed to the sixth spot, up from spot 18 last quarter. Phoenix and San Jose were the hardest hit in the office property sector in Q210, dropping 15 spots to No. 21 and 14 spots to #28 respectively. KBW attributed the drops to poor vacancy rates and effective rent growth. Washington DC has the lowest level of vacancy and Detroit has the highest. Overall, however, KBW noted that "no REITs have significant (greater than 10%) exposure in terms of portfolio square footage to either the top or bottom-ranked office markets in this report." The best industrial markets for risk exposure are Richmond, Denver, Nashville, Baltimore and Houston, the top two of which are tied for rank No. 1. Miami, Tampa-St. Petersberg, Phoenix, Detroit and San Diego are the worst markets. In this sector, three REITs have significant exposure to the top-ranked and bottom-ranked industrial markets. First Potomac Realty Trust (FPO) located in Richmond, Va. has 15% of its portfolio square footage in the No. 1 MSA and Eastgroup (EGP) has 17% of its industrial portfolio in the No. 5 MSA, Houston. PS Business Parks (PSB) has 18% of its portfolio square footage in Miami, the No. 1 worst MSA. Austin, Baltimore, Raleigh-Durham, Charlotte and Denver are the best markets for retail risk exposure while Tampa-St. Petersberg, Orlando, Indianapolis, Atlanta, and St. Louis have the worst. Austin has the second-best change in vacancy for 2010, down to 24%, and Baltimore has the highest increase in effective rent this quarter at 5%. California has the top-three retail MSAs in terms of current vacancy with San Francisco (4%), San Jose (6%), and Los Angeles (6.2%). KBW reported that no Midwestern market ranked better than 20th in terms of current vacancy, although Indianapolis is expected to have the largest decrease in vacancy rate in 2012. Several REITs have risk exposure in some of the 'worst' markets: Kite Realty Group (KRG) has 27% of its GLA located in 27th ranked Indianapolis; Equity One (EQY) has 12% of its GLA located in 26th ranked Atlanta; EQY has roughly 7% of its GLA located in both Tampa-St. Petersburg and Orlando, for a total combined exposure of 14% to the two lowest ranked markets. In the hotel sector, the best markets for risk exposure are Boston, Minneapolis, San Francisco, Chicago, and Denver. Boston maintained it top ranking based on Q210 performance, near-term supply outlook, occupancy change, revenue per available room, demand change, average daily rate, short-term supply forecast and supply exchange. Hersha Hospitality (HT) has 10% of its rooms in the city. Strategic Hotels and Resorts (BEE) has significant exposure to top-ranked markets, with 22% of its rooms in San Francisco and Chicago combined. DiamondRock (DRH) has 20% of its rooms in chicago and LaSalle (LHO) has 13%o fits rooms in Chicago. The worst MSAs for hotel risk exposure are Houston, Orlando, Dallas, Tampa-St. Petersberg, and Seattle. Austin topped the list of best market for exposure in the multifamily sector, followed by Charlotte, Houston, Seattle and the District of Columbia. The worst is Los Angeles, which has the sixth lowest vacancy rate at 5.5%, followed by Detroit, Cleveland, San Francisco and St. Louis. Of the top-five ranked MSAs, the heaviest concentration of multifamily REIT net operating income (NOI) exposure is derived from the District of Columbia, a total of six: Home Properties (HME) at 29%; Post Properties (PPS) at 20%; Camden Property Trust (CPT) at 19%; Apartment Investment and Management Company (AIV) at 13%; UDR, Inc. (UDR) at 12%; and Equity Residential (EQR) at 10%. Colonial Properties (CLP) earns 14% of NOI from #2-ranked Charlotte, while Essex Property Trust (ESS) earns 15% of revenue from #4-ranked Seattle. While Apartment Investment and Management Company (AIV) derives 13% of NOI from highly ranked DC, 10% of AIV’s NOI comes from the lowest-ranked MSA, Los Angeles. Also deriving NOI or revenue from Los Angeles are BRE Properties (BRE) 13% of NOI, and ESS (21% of revenue). BRE is also largely concentrated in #28-ranked San Francisco (21% of NOI). See where all cities are ranked by clicking the chart below. Write to Christine Ricciardi.

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