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REITs Thriving as Recovery Nears

12/08/2010 | By Allen Kenney

REITs Thriving as Recovery Nears
With a strong recovery in the commercial real estate market seemingly right around the corner, REITs are already enjoying a prosperous rebound, according to an analysis from Deloitte Real Estate Services.

Deloitte noted that even though commercial market fundamentals are showing signs of gradual improvement, REITs have already bounced back. Consequently, REITs are positioning themselves to capitalize on opportunities.

"Return on investment for REITs has outperformed the competition recently, and firms are taking advantage of the spotlight by raising funds, which could eventually lead to increased acquisition activity for the segment," the report said.

REITs also could gain favor with investors seeking to hedge against volatility in the broader markets, according to Deloitte, citing their outperformance of measures such as the S&P 500 and Russell 2000. Deloitte attributed the industry's strong showing to REIT management teams.

"The recent REIT rally has been driven, in part, by investors' realization that REITs took on far less debt than private real estate investors during the peak-to-trough period of 2007 to 2009, and sold at the top of the market, while private equity investors continued to buy," the report said. "Conversely, when the market plummeted, REITs began to acquire properties from highly leveraged investors at deeply discounted prices."

Looking ahead, Deloitte listed a host of attributes that could attract investors to REITs as the economy continues its recovery.

"In addition to providing dividends to investors, REITs include hard assets, and as such traditionally have been perceived as safe havens during economic downturns and a potential hedge against inflation," Deloitte said. "As recent results indicate, REITs also frequently have a low correlation to conventional assets, such as stocks and bonds. In addition, REITs offer the advantage of professional management, and provide portfolio diversification."

Despite the generally optimistic tone in its report on the outlook for commercial real estate in 2011, Bob O'Brien, vice chairman and partner with Deloitte who heads the firm's U.S. Real Estate Services unit, did sound notes of caution.

"Following sharp declines and painful deleveraging in the wake of financial and economic turmoil, commercial real estate is showing signs that the deterioration of industry transactions and fundamentals has begun to plateau, and that early stages of recovery may be imminent," O'Brien said. "Despite some encouraging activity, however, impediments such as looming debt maturities and high unemployment rates are causing uncertainty, dimming prospects of a robust, short-term rebound."