Published January/February 2013
Brian Jones is SVP and co-portfolio manager with Neuberger Berman
Brian Jones received a B.A. from Harvard University. He joined Neuberger Berman in 1999 as an associate analyst. In 2003, he became an analyst covering REIT securities and was named an associate portfolio manager for separately managed accounts investing in REIT securities in 2007.
We are in a very uncertain investing market. Do you think that investors still view commercial real estate, particularly REITs, as a stable investment class?
I think so. I think REITs have performed very well over the past two to three years, and when we consider the prospects for REITs over the next few years, we believe commercial real estate fundamentals are likely to improve and that cash flow growth within the REIT sector will remain strong.
These characteristics should continue to attract broad interest from investors. Particularly due to the fact that REITs pay higher dividends, we think investors will continue to embrace the REIT structure over the next few years.
What are some of the main challenges for REITs right now?
REITs face the same challenges that most other portions of the economy face. The economic recovery over the last few years has been more modest than most economic recoveries. Job growth has been slower than the usual economic recovery, and 2 percent GDP growth is a bit weaker than we have seen in most expansion phases. So, REITs have to contend with this slow growth environment.
Additionally, some of the REIT sectors face particular challenges. For example, office users are looking to use office space more efficiently and utilize less space per employee. The office sector has to contend with that headwind, as well as a modest growth environment.
Sector-wise, where are you most bullish?
Currently we think that the apartment REITs offer an attractive long-term return potential. There are a few demographic factors that support strong performance of the apartment rental space. The echo boom generation is in its mid-20s at this point, and that’s a prime rental age. Additionally, it’s still difficult to qualify for a mortgage to purchase a single-family home.
The last piece of the puzzle for apartment REITs, in our mind, is that they underperformed in 2012.
So, coupled with the strong underlying fundamentals and recent share price underperformance versus other sectors, apartment REITs are positioned to potentially perform well
What stands out to you about the resiliency of the REIT sector over the past year and what are your expectations for the coming year?
REITs have been able to generate, by our estimates, about 8 to 10 percent cash flow growth, and that’s a very attractive level of cash flow growth. So, I think investors were pleasantly surprised that the REIT universe broadly was able to deliver such robust cash flow growth
I expect operating fundamentals to continue to strengthen for most REITs in 2013. The current environment of limited new construction and gradually improving demand from tenants should continue. I believe this scenario could lead to another year of 8 percent to 10 percent cash flow growth for REITs on average in 2013.
I expect well-capitalized REITs to accelerate their development and acquisition activities as an improving economy creates more investment opportunities for the strongest REITs.
In my estimation, investors will continue to be attracted to both the current income generation characteristics of REITs, as well as the capital appreciation potential in the event that commercial real estate values continue to recover.