While U.S. REITs have been able to improve their balance sheets since the financial crisis, a growing focus on global macroeconomic concerns is driving the REIT market's performance, according to Tony Kenkel, portfolio manager with Principal Global Investors.
"I think the unfortunate thing is we continue to be in a very macroeconomic-driven world," he said in an interview with REIT.com. "If we look back over the past few years from a macro perspective, it was all about systemic risk."
Kenkel, who oversees Principal's Global Real Estate Securities Fund, said the global financial crisis put a spotlight on REITs' balance sheets, and those concerns drove the industry's ups and downs during the economic downturn. Those worries have dissipated, he said.
"As we look at REITs today, we're done with balance sheet concerns," Kenkel said. "But there are now global macro concerns that influence real estate."
While the European debt markets are weighing on the minds of many investors today, Kenkel highlighted another international region that is showing cause for concern.
"We've also got strong decelerating growth in much of Asia Pacific. People are concerned about how sharp that deceleration is and whether or not we'll see some sort of hard landing coming out of the Asia Pacific region," Kenkel explained.
In terms of specific property sectors within the REIT market, Kenkel mentioned that he's bullish on apartments and hotels due to their strong operating fundamentals. However, he did add that he believes the growing demand in the apartment sector, which was up 5.8 percent in 2012 through June 21, according to data from the FTSE NAREIT U.S. REIT Index Series, will start decelerating sharply in the face of new supply entering primary markets.
Likewise, Kenkel expressed skepticism about the sustainability of the performance in the hotel sector, which he said is "defying gravity." Through June 21, the hotel sector had gained 9.4 percent, according to the FTSE NAREIT Index data.
"When you look at the macroeconomic headlines, you typically expect hotels to be extra sensitive to a slowing GDP," he said. Yet, hotels continue to experience gains in fundamental measures such as revenue per available room, thanks primarily to business travelers. Kenkel explained that while businesses generally are not hiring, they are putting their workforces on the road to meet with existing and prospective clients. At some point, he said, if the country doesn't see a better employment recovery, hotel fundamentals will be affected.