ELSEWHERE: Investors Slim Down As Property Prices Bloat

"I said to them, 'I noticed there hasn't been a lot of activity in our portfolios as a seller, and had they been evaluating that,' " said Mike McCook, the Calpers official. "It's an opportune time to take advantage of the market, as it's pretty frothy."

With commercial-real-estate prices hitting records in many markets, some of the shrewdest players are cashing out.

The sellers range from old-line real-estate families to pension funds, insurance companies and other big investors. The buyers are often real-estate investment trusts, whose returns have soared recently; investors shifting money into real estate from the stock market; and eager foreigners taking advantage of a weak dollar.

Among the biggest sellers is Calpers, which often joins with other big investors when it buys real estate. Together with those partners, Calpers has sold $6.5 billion of office buildings and shopping centers in the past three months alone, accounting for half of its real-estate investments. Those properties often sold for record prices, and Calpers has more real estate on the block. It has on the market a $1.4 billion portfolio of industrial buildings it owns with Chicago-based Jones Lang LaSalle Inc.'s LaSalle Investment Management.

One partner that sold along with Calpers was Hines Interests LP in Houston, which sold 12 buildings at "substantially higher numbers than our optimistic expectations," said Daniel MacEachron, a senior vice president. The prices, which were 5% to 10% higher than what they expected and 15% above the appraised value, broke per-square-foot sales records in Greenwich, Conn., Seattle and Washington. "The type of pricing we're seeing in the market today" is unlikely to continue for another 12 to 18 months, "if that," Mr. MacEachron said.

Driven by low interest rates and almost insatiable demand, real-estate prices rose strongly in most areas last year. According to Real Capital Analytics Inc., a New York real-estate research firm, the average price for apartment buildings rose 26% in 2004, while industrial properties were up 21%, office buildings gained 6% and retail properties increased 14%.

The prices for buildings keep rising even though vacancy rates remain high in many areas and rents are stagnant or falling. And some of the biggest price jumps occurred in markets where occupancy and rental rates at office properties have suffered the most, such as the Houston and San Francisco metro areas, where prices for office buildings soared 55% and 41%, respectively, according to Real Capital Analytics.

As it did during the stock-market bubble, trading volume has increased. A record $182 billion of apartment, industrial, office and retail properties changed hands last year, a 50% jump from 2003, according to Real Capital. More than $29 billion of apartment, industrial, office and retail properties went up for sale during the first two months of this year, more than double the nearly $12 billion of properties that hit the market during the same period last year.

To be sure, real-estate investment firms and pension funds sell real estate for different reasons, and there are reasonable arguments -- such as rebounding demand and low interest rates -- to justify the higher prices.

In addition, other sophisticated investors are buying, though often they are being forced to put money to work to diversify their funds or because they have taken in substantial amounts of money that they need to invest. Even amid the lofty prices, many maintain that commercial real estate continues to be a good investment given the alternatives: a sputtering stock market and a vulnerable bond market. With real-estate investments generating returns that are "as good as or better" than the stock and bond markets, "we continue to see very strong demand for real estate," says D. Michael Van Konynenburg, chief executive of Secured Capital Corp., a Los Angeles real-estate investment bank.

Others disagree, including the Malkin family, well-known New York real-estate investors. A partnership formed by Peter Malkin and his son, Anthony, recently tripled its money when it sold for $75 million a 242-unit apartment complex in Fair Oaks, Va., that it bought nine years ago for $25 million. The buyer, Comstock Homebuilding Cos., plans to sell the units as condominiums, one of the hottest areas of real estate.

Anthony Malkin, general partner of the group that sold the apartment complex, says that normally the investors in Malkin-led partnership ventures would buy another property to defer the capital-gains taxes. But, with property values so high, the investors in this partnership will pay the taxes. "The market is so overheated," he says. "We don't see an opportunity" to purchase another property "given the low yields available out there" in today's market.

Just two years ago, the Malkin-led partnership had been offered $52 million for the complex. After getting local approval to convert the units to condos, the Malkin group sold it for about 50% more.

Comstock Chief Financial Officer Bruce Labovitz says the Reston, Va., company simply paid "what today's market would support," considering the dearth of available land in the area, the time and cost of building such a property from scratch and the price buyers are willing to pay for a condo. Comstock plans to spend $11 million to renovate the property and sell the units in the low-$200,000 to high-$400,000 range, Mr. Labovitz says. The median price for a condo in the area is about $316,000, according to DataQuick Information Systems, which tracks U.S. real-estate sales.