COVER STORY, AUGUST 2006

THE EXCHANGE RATE
1031 Investors rave about region’s growth.
Daniel Beaird

Southeast Real Estate Business recently spoke with leading investment firms that hold 1031 Exchange investment properties in the Southeast. How is the market faring against other parts of the country, and what does the future hold for investors in the Southeast?

FORT Properties’ Whitehall Tech Center in Charlotte, North Carolina.

The Southeast has become very competitive for the 1031 exchange market because of the amount of capital chasing a limited amount of property. “Other parts of the country have become so expensive that institutional investors have focused on parts of the Southeast because they cannot get the same type of product for their dollar on the West Coast or in the Northeast,” Runnels says. Pension plans have changed their allocations during the past few years as well. In the past, a certain amount of the pension plan portfolios were earmarked for real estate and a certain amount of the portfolios were earmarked for stocks and bonds as well as other types of investments. According to Runnels, pension plans today have increased their allocations to real estate as part of the overall portfolio. “So there is more capital in the marketplace chasing that limited amount of property,” Runnels says. And since investors can get more bang for their buck in the Southeast, cities like Tampa, Orlando, Nashville, Charlotte and Charleston, which were not on the horizon a few years ago, are gaining the attention of investors.

Steady job growth and a growing economy have led to more interest in Southeastern real estate properties. According to Runnels, FORT Properties looks for emerging markets that have stable and predictable cash flows, and the Southeast provides that. “We are very bullish on Central Florida, especially Tampa and Orlando,” Runnels says. “We have also been successful in the Carolinas as well as Nashville.” FORT Properties entered those aforementioned markets 2 to 3 years ago. “We entered ahead of the curve,” Runnels says. Today, more and more are following FORT Properties into the Southeast market.

Nashville is attracting new business to its city through Tennessee’s tax incentives. Nissan recently relocated its U.S. corporate headquarters from Los Angeles to Nashville. And many other businesses that serve Nissan will follow. Tennessee’s tax incentives include excise and franchise tax credits as well as limited personal income and sales tax. According to U.S. Census data, Rutherford County, Tennessee, is ranked first in the country in job growth. This provides investors with ample opportunities in the Nashville as more property is built to keep up with the job and population growth.

The Charlotte market is also interesting to investors as it is a major finance center and home to two of the world’s largest banks, Bank of America and Wachovia. “Charlotte and the surrounding areas are still building infrastructure to support its growth,” Runnels says. “Geographically, the city is in the corridor of both the East—West distribution system and the North—South distribution system.” And that is important for a company like FORT Properties, which focuses on office, warehouse and distribution properties in the Southeast. Staying in the Carolinas, Charleston has become a port of entry for the industrial sector in the region. With its location on the coast and on Interstate 95, it can provide quick access to products for the entire Eastern seaboard. “We are very bullish on Charleston for exact reason of distribution,” Runnels says. 

Interest in the Southeast has been building for some time now as people continue to move to the region for job opportunities as well as retirement. “Broad awareness of the performance of the markets has helped put the Southeast on the investment radar screen,” Runnels says.

For SCI, another 1031 Exchange player, the Southeast is its top target area in the country. “A majority of our investments are in Florida, Georgia and Texas,” says Scott Lunine, managing director for SCI. “We are focused on the Carolinas as well. We stick to the Sun Belt states because the best growth is there.” SCI likes the growth potential in the Carolinas as much as it liked the growth potential in Florida 4 years ago and Atlanta 2 years ago. “We bought a retail property in Anderson, South Carolina, that is anchored by Pier 1 Imports and Old Navy and the return on it was 7.5 percent,” Lunine says. “Investors from California or Chicago never see anything like that in other parts of the country.” So the competition for Southeastern properties has risen tremendously during the past few years. According to Lunine, that competition is not just from the usual players either. “It is coming from foreign investors as well,” Lunine says. “Everywhere from South America to Germany to China to Korea.”

According to Lunine, the 1031 Exchange market in the Southeast is still a seller’s market. “We are seeing deals now that are staying on the market a little longer, but the exchange market is still experiencing an upside,” Lunine says. “Sellers are still not ready to come off their prices to match the rising interest rates.”

The Southeast’s commercial real estate market continues to grow as the population count rises and job growth remains steady. The 1031 Exchange market in the Southeast follows the rising wave of interest in Southeastern commercial real estate. The region shows an upside that the rest of the country struggles to match. While the state of Florida has always drawn a lot of interest from investors, other states in Southeast like Georgia, Tennessee and the Carolinas are beginning to make a name for themselves in the 1031 Exchange market. As investors try to stay ahead of the curve, the Southeast provides the best opportunity for growth in the country.

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