Office REITs Choosing to Develop Rather Than Buy

The Real Estate Investment Trust (REIT) market has seen exponential growth this year, having produced over $16 billion in transactions for the first six months alone. That number continues to increase as the year-end nears.

According to Deloitte’s CRE 2015 Outlook Report, REITs will likely continue to offer positive returns to investors through next year due to the additional diversification opportunities from the growing number of REIT conversions.

With the price of office buildings in the top U.S. markets on the rise, many REITs are choosing to build rather than buy existing properties. This has led to the most commercial development by REITs in the past decade.

While it is anticipated that plans for new development within the REIT sector will continue to grow, the availability of capital from traditional sources remains a question. Although bank lending is beginning to recover, with the interest rate horizon expected to remain flat, it is not clear that the availability of development lending will meet the demand. As a result, alternative sources of funding will be a very important tool for REITs.

One of the alternative funding sources that is becoming mainstream is use of the EB-5 immigrant investor program. Congress established the EB-5 program in 1990 as a means of boosting the U.S. economy and creating jobs. Investors in EB-5 are primarily motivated by the immigration benefits the program can provide, making receiving a significant financial return only a secondary consideration.

Although the program has been in existence for several decades, the use of EB-5 capital in commercial real estate has exploded in popularity in recent years. Some of the country’s largest CRE developers are turning to this effective, low-cost funding method as a way to raise capital for their projects.

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