Mike Kirby, chairman and director of research with Green Street Advisors, has closely followed the REIT industry since his company was founded 25 years ago. In that time, he has seen listed REITs dramatically change the commercial real estate landscape.
"REITs have set a benchmark for what a real estate company can aspire to be," Kirby says. "Balance sheet management skills alone are a game changer. In addition, just the operational excellence that you see at the best REITs in every property sector is something that has never happened before in the history of real estate."
Taubman Centers' November 1992 IPO was the first using the UPREIT structure. In an UPREIT, the parties of an existing partnership and a REIT become partners in a new "operating partnership." For Kirby, this was the most significant development of the past 50 years.
"UPREITs allowed a lot of private owners of real estate to come public in a way that they didn't have to pay taxes as they came public," Kirby says. "The REIT IPO boom from 1993 to 1995, in which we saw many of today's best REITs come public, would have been a fraction of the size that it was had the UPREIT never been invented."
In terms of a less-heralded event, Kirby says the privatization of some leading REITs (including Archstone-Smith and Equity Office Properties) prior to the Great Recession in 2007 will stand as a benchmark for REITs' savvy management.
"The fact that these companies were both astute enough and ethical enough to take a high bid when it came along really speaks volumes about one of the strengths REITs have on the capital allocation front," Kirby says. "At the same time private vehicles were buying every piece of real estate they could, the biggest public REITs were fielding offers to sell their companies. Those that did gave us all one more reason to prefer REITs to other vehicles."
Looking forward, Kirby says he favors the REIT approach to real estate investment over other forms because: it has better alignment of interest; lower overhead; the companies are much better operators of properties; and the properties themselves tend to be higher quality.
"We will see a lot more investor constituencies begin to prefer REITs over other vehicles," Kirby says, adding that the industry's track record speaks for itself. "We have always operated Green Street by the fact that the REIT vehicle is superior and that it should grow over time. That is as true today as it was 25 years ago when we started the company."