Despite some areas of weaknesses, market fundamentals on the whole should continue to improve for REITs in 2013, according to Jonathan Litt, managing principal of Land and Buildings Investment Management LLC.
Litt recently released his list of “must own” property stocks for 2013. He spoke with REIT.com about the supply-demand dynamics in the market, challenges for the REIT industry and his high opinion of the multifamily and cell tower sectors.
REIT.com: How would you describe where commercial real estate fundamentals are in January 2013?
Jonathan Litt: I think they are continuing to improve, broadly speaking. The reason I say broadly speaking is that there has been acceleration generally across the board, but there have been areas where things have slowed or weakened.
On the weakening front, clearly the Washington, D.C. office market is difficult, and the Washington, D.C. apartment market is going to be difficult. Because of the new supply coming on, office is hurt by the political environment. The midtown Manhattan office market has also been very slow.
But we have a strong demand in the apartment space. it might be moderating, but it is still among the best growth rates in the REIT space. Malls are very strong, and cell towers are the strongest and will likely continue to be.
REIT.com: In regards to supply and demand dynamics, other than apartments, which sectors are benefitting most from growing demand?
Litt: I think the cell towers, by far, are benefiting from very little supply and very meaningful demand. After that, we’re seeing the self-storage space benefitting, the malls benefitting and the outlet mall space. Supply generally isn’t an issue, but in the places where demand is really strong, there’s very little supply.
REIT.com: What would you say is one of the larger primary issues or concerns facing the current REIT market?
Litt: I think the thing that was most frustrating in the REIT space, starting in September of last year, was just the sheer volume of equity issuance. I can’t single out a company for doing something that they shouldn’t be doing, but taking all of it in total is exhausting the demand for REIT stocks. We’d love to see a moderation in issuance, so that stocks can deliver the returns they should deliver.
The other concern is if interest rates really spike and there is no commensurate increase in growth. Usually, when interest rates go up, you have an increase in the growth prospects, and REITs do very well, so, really, we’re worried about a static inflation environment. I think it’s a low probability, so we’re not losing a lot of sleep over it.