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Office Sector Has Potential to Outperform Next Year, Analyst Says

12/03/2013 | By Mitch Irzinski

Tony Paolone, an executive director with J.P. Morgan Securities, joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Paolone was asked if the performance of any particular sector had surprised him this year.

“We’ve been a little bit surprised by some of the underperformance out of the mall companies,” he said. “You have a group of stocks in organizations that have put up very good internal growth, some of the highest levels of cash flow growth in the entire REIT space. Yet, the stocks just haven’t kept pace as we would have thought this year. We think what’s happened is we’ve had a little bit of the fear overgrowth potentially slowing over the next couple of years make their way into the stocks, much the way they did into the apartment names over the last couple years.”

Paolone talked about which sectors he expects to outperform in 2014.

“One area that we’re thinking longer and harder about right now is in the office sector, which has been very slow to see its fundamentals improve through this cycle,” he said. “If we look out and believe that the economy is going to continue to improve and we move further and later into the cycle, perhaps you might see a little acceleration in earnings growth out of some of the office names, and perhaps that will start to attract some capital as well. So, we’re watching the office sector pretty closely going into next year.“

Paolone also discussed sectors that he is less enthusiastic about.

“The areas we have a harder time getting excited about are the net lease and health care spaces,” he said. “If we take the view that things are going to get better - interest rates may potentially move a little bit higher - those are likely the areas that would potentially see either selling or just a little bit of a tougher time growing in comparison to other parts of the REIT space.”