04/09/2014 | By Sarah Borchersen-Keto
The real estate sector is roughly at mid-cycle, with low levels of new supply, improving tenant demand, and ample capital supply all expected to support growth in the REIT industry over the next few years, according to industry executives and analysts.
“We’re past the deep distress period and are somewhere in the middle of a recovery in the U.S.,” said Jonathan Gray, global head of real estate at Blackstone, during the NYU Schack Annual REIT Symposium April 8.
“The basics of the business are really good across all sectors. Strong operating fundamentals have a lot of room to run,” said Martin Stein, Jr., CEO of Regency Centers Corp. (NYSE:REG).
Joseph Coradino, CEO of Pennsylvania Real Estate Investment Trust (PREIT) (NYSE: PEI), expressed optimism that there is still room for recovery. “We think we’re early in mid-cycle," he said.
Matthew Lustig, head of real estate at Lazard Ltd. added, “After a lot of years of weakness, the next couple of years should be pretty good.”
KImco Realty Corp. (NYSE: KIM) CEO David Henry noted that the midpoint of the cycle may not have even been reached, as rents “haven’t come close to where they were before the recession, nor has construction activity.”
Ric Clark, CEO of Brookfield Property Group, agreed that the real estate sector should be in “pretty good shape” for a few more years. “We’re in late middle innings and the Fed could send us into extra innings,” Clark said.
Quality Assets Harder to Find
Panelists at the symposium noted that the lack of new supply across the REIT industry has increased competition for the top-class assets that are being sought by REITs eager to upgrade their portfolios.
According to Kimco’s Henry, competition from the private market has led to price gains in top tier assets. “It’s very tough out there,” he said.
“Acquiring A (class) assets is very, very difficult,” agreed Coradino of PREIT.
Joel Marcus, CEO of Alexandria Real Estate Equities, Inc. (NYSE: ARE), noted that most of the company’s target markets are urban, where prices are too high, so the REIT has primarily turned to development instead.
And while finding top class assets is getting harder, offloading lower performing assets does not pose a problem, executives agreed.
“The market for B assets is strong today and getting stronger...it’s a wonderful time to take advantage of that and upgrade your portfolio,” said Henry. Due to the difficulty in finding top quality assets, however, “a lot of us are reallocating capital to redevelopment where we can get higher returns,” he added.
Coradino noted that PREIT has three lower quality assets on the market currently, and has also sold a number of C-class assets. “You’re really talking about selling to some very entrepreneurial folks,” he remarked.
Millennials, NAV, Investor Activism
Panelists at the NYU REIT symposium addressed a number of other topics, including the growing importance of the millennial generation, the focus on net asset value (NAV), as well as investor activism.
“Millennials have changed everything…it’s absolutely profound what’s happened,” stated John Kilroy, Jr., CEO of Kilroy Realty Corp. (NYSE: KRC). One trend that Kilroy is embracing is an increased occupancy per square foot in new office development. “If your office buildings don’t accommodate that, you’re in a risky position,” Kilroy said.
Richard Mack, CEO of Mack Real Estate Group, added, “if you don’t get on the bandwagon of what the millennials want, you’re going to be lost.” He explained that Mack is focusing on highly-amenitized class A multifamily units in cities such as Seattle, Los Angeles, Miami and New York.
Turning to NAV, Debra Cafaro, CEO of Ventas, Inc. (NYSE: VTR), expressed the view that too much attention in the REIT industry is paid to NAV. “I think we do ourselves a disservice by our slavish devotion to NAV,” she said. Cafaro explained that while NAV is “a great safety net for investors, it shouldn’t be the only story in the REIT industry.”
Ronald Havner, Jr., CEO of Public Storage, Inc. (NYSE: PSA), added that “far too little focus in this industry is on cash flow, cash is the driver of value.”
Meanwhile, the pros and cons of investor activism also came under review.
Mike Kirby, director of research at Green Street Advisors, argued that the REIT industry is characterized by “some really smart investors.” Kirby described activism by REIT investors as “very healthy.”
Cafaro agreed that while “there’s nothing wrong with a little healthy activism…it can get very destructive and not all shareholders are alike.”