REITs Well-Positioned for Continued Recovery

10/25/2011 | By Carisa Chappell
While 2011 returns have not been what REIT investors had hoped, REITs continue to outperform the major markets and remain well-positioned amid the economic uncertainty, according to a Deloitte report released Oct. 24 on the top 10 issues facing commercial real estate in 2012.

Bob O’Brien, vice chairman and real estate sector leader for Deloitte, said listed REITs as a whole are in relatively good shape, thanks to improving underlying property fundamentals, favorable market dynamics and access to capital.

In addition to REITs, the report discussed a number of key issues to watch in the coming year, including globalization, macroeconomic fundamentals, commercial real estate fundamentals, lending, commercial mortgage-backed securities, private equity, deal flow, the residential real estate market and the residential mortgage market.

The report noted that REITs have been successful in bolstering their portfolios by deploying available capital for opportunistic and strategic acquisitions.

“Improved access to capital drove significant transaction growth and REITs were able to acquire prime properties within major markets at favorable prices due to the overall market distress,” O’Brien said.

However, O’Brien explained that unlike pre-recession times, growth prospects for REITs today are now heavily dependent on mergers and acquisitions and driving increases in rents. This is mainly due to a lack of new construction activity in the pipeline.

In terms of the outlook for 2012, O’Brien said that in addition to growth through acquisitions, REITs are expected to continue to focus on property operations, leasing and property mangement to add value until a full-fledged economic recovery resumes.

While O’Brien said there is no certainty about the relative outperformance of REITs over competing asset classes, an improvement in the broader economy likely will be the key to their sustained growth.

“I think the most significant challenge that REITs face is shared by companies in other industries, the significant uncertainty in these economic times. The impact that it’s having on real estate and fundamentals are a concern,” he said.

Other issues, including overall fundamentals in the commercial real estate sector, show signs of improving, but at a varied pace. The drastic drop in development activity amid tight underwriting standards and contracted demand levels may reduce activity in commercial real estate, according to the report.

“The delay in the improvement of market fundamentals within the office, industrial and retail sector may continue to be an indicator of an era of reduced expectations and growth,” O’Brien said.

Delinquencies also remain a concern as debt incurred at the height of the market is now coming due. With $1.8 trillion in commercial real estate debt maturities by 2015, the slower recovery of non-prime properties and continued economic uncertainty remain challenges for the industry, according to the report.

When it comes to global commercial real estate, the report pointed out that it continues to gradually improve, despite growing concerns over sovereign debt and the pace of future economic expansion. O’Brien said the global industry has benefited from a partial rebound in manufacturing activity, increased business spending and higher capital flows into real estate.

Additionally, the report noted foreign investment in U.S. commercial real estate continues to rise and is a key component to recovery in the commercial real estate market. However, that growth may soon take a back seat if global economic challenges persist.

“Economic uncertainties, such as the sovereign debt crisis in Europe, may stall near-term foreign investment and slow recovery momentum with the transaction market during the latter half of 2011 into 2012,” O’Brien said.

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