By Alejandro Lazo
Washington Post Staff Writer
Monday, October 29, 2007

While the credit squeeze is keeping private-equity firms from making big commercial real estate plays, it may soon create an opening for buyers less reliant on borrowed cash.

Publicly traded real estate investment trusts have been muscled out of big deals in recent years as private-equity firms drove up prices, taking advantage of their access to cheap debt to buy and resell properties for quick gains. Now, with a tighter lending environment and prices on some properties expected to fall, real estate investment trusts are preparing to get back into the game, executives and analysts said.

Two REITs with significant Washington area holdings said last week that they would step up efforts to make opportunistic purchases in coming months. The Washington Real Estate Investment Trust, headquartered in Rockville, and Boston Properties, a Boston company with a heavy local presence, said they viewed the area's commercial market as resilient and likely to weather an economic downturn.

"We're looking at everything," George F. McKenzie, chief executive of Washington REIT, told analysts in a conference call last week. "We're focused on our region and . . . we have to be focused on where opportunity presents itself."

Both companies reported higher profits last week. Washington REIT said its funds from operations in the third quarter were $27.7 million, up $3.3 million from a year earlier. Boston Properties said its funds from operations were $139.1 million, up $1.8 million.

In conference calls with investors, executives of both companies spent considerable time discussing the credit market turmoil this summer and opportunities created in its aftermath.

Washington REIT, whose portfolio includes only Washington area properties, said it was able to complete its $58 million sale of the Maryland Trade Center in Greenbelt despite the debt-market troubles. The undisclosed buyer was able to finance 78 percent of the transaction, even in a tighter lending environment, McKenzie said.

He said the company was under contract to buy one office building and would look to make more deals in coming months. Washington REIT said that its balance sheet was healthy and that it had the room to expand its credit line if necessary.

Demand for properties inside the Beltway remained strong, McKenzie said. To find deals, he told one analyst, "you better be looking out in the fringes."

Boston Properties said it would consider using an "opportunity fund" to begin making acquisitions with other investors. Over the past few years, its strategy has been to focus on selling buildings and developing new ones.

Boston Properties, which has investments in several other major cities, is the Washington area's second-largest commercial property owner, after Vornado/Charles E. Smith, according to Cushman & Wakefield.

Boston Properties said it recently signed a deal to sell several buildings in the Washington suburbs for $125 million. The company said the deal is expected to close before Thanksgiving but did not identify the properties. The firm also said it would begin developing the old George Washington Hospital site.

Boston Properties said it remained bullish on its properties both in the District and in Reston, where it is developing its second phase of Reston Town Center, with 85 percent of its construction pre-leased. The company has a 97.9 percent occupancy rate in the Washington area, its second-strongest market after midtown Manhattan, the company reported last week.

But Douglas T. Linde, chief financial officer of Boston Properties, said that the commercial real estate market nationally was only beginning to see the results of the credit crunch. He said some buyers may have overpaid.

"To date, no one has been prepared to recognize any losses," Linde said. "But we are just beginning to see these events play out."