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Situation in Washington Creating Uncertainty for REITs

06/08/2011 | By Allen Kenney

As policymakers in Washington grapple with government deficits and spending, "it could go either way" for REITs, according to Glenn Mueller, professor at the University of Denver Franklin L. Burns School of Real Estate and Construction Management and real estate investment strategist with Dividend Capital.

In a REIT.com video interview at REITWeek 2011: NAREIT's Investor Forum at the Waldrof=Astoria in New York, Mueller discussed how prevailing economic trends are impacting the REIT market. He said the market is currently facing a "unique situation" in terms of the discrepancy between the physical real estate cycle and the financial cycle.

He noted that the physical cycle, represented by occupancy rates, hit bottom in 2010 and have started to improve. This year, rents are improving.

"Interestingly enough, prices seem to have bottomed in 2010 and started up as well," Mueller said.

Mueller did point out that a "bifurcation" has occurred between major markets, such as New York, Chicago and San Francisco, and the rest of the country. Institutional investors have started purchasing properties in the top-tier markets, pushing those prices up. Meanwhile, other markets have yet to experience prices increases, even though their occupancy and rental rates are improving.

Mueller also touched on the potential impacts that policy decisions could have on the REIT market, both positive and negative.

"Obviously, one of the biggest concerns is with more debt, eventually higher inflation, higher interest rates," Mueller said. "Loss of confidence in the U.S. government as a risk-free investment could really disrupt the market or push more towards other income-producing investments like REITs."

Looking ahead, Mueller said he's interested in "watching to see in general how the world does." He noted that China's rapid economic growth has raised questions about its ability to sustain that momentum.

"Are they going to have some problems that might affect the world economy?," Mueller asked. "The United States used to be the biggest gorilla on the planet. We still are, but these developing countries are really coming along."