Mid-year Commercial Real Estate Outlook: Promising Signs for Second Half

Despite lingering economic uncertainty, REIT industry analysts, investors and CEOs appear to be maintaining a strong outlook for commercial real estate in the second half of 2012.

Approaching the halfway point of the year, the FTSE NAREIT All REIT Total Returns Index was up 10.88 percent through June 14. A survey conducted jointly by professional services firm PwC and the Urban Land Institute, a research institution, indicated there's growing optimism about the remainder of the year throughout the commercial real estate industry. Survey participants forecasting "good-to-excellent" profits for 2012 increased from 42 percent at the beginning of the year to 48 percent in the latest report.

John Perry, a REIT analyst with Deutsche Bank, said he expects REITs to continue to show healthy returns, noting that "the defensive quality of REITs should give some outperformance in a turbulent market."

"I think, clearly, right now is a more challenging time for both REITs and the broader market. However, I do think that REITs, because of their relatively good earnings ability and the ongoing fundamental recovery, should outperform," Perry said in an interview with REIT.com.

Generally speaking, Class-A landlords are in the best position heading into the second half of the year, according to Perry. He explained that the flight towards the quality of the best and most productive centers, combined with a low level of supply, should bode well for Class-A real estate holders.

One of the highlights in the industry has been the performance of the industrial sector. Through June 14, year-to-date total returns for the sector were 13.63 percent. Arthur Jones, an economist with CBRE Group Inc., said he has witnessed sustainable improvement in the sector.

"The manufacturing sector was hit inordinately hard, but a lot of those companies are coming back," Jones said in an interview with REIT.com. "Auto manufacturing is strong. Trade has picked up and signifies a good demand for industrial space."

Don Wood, president and CEO of Federal Realty Investment Trust (NYSE: FRT), said the retail sector has also had a good first half of the year. Through June 14, the retail sector, including shopping centers, regional malls and free-standing retail sites, had total returns of 15.55 percent.

"I think consumer confidence has been stronger than I thought it would be. People are out there shopping," Wood said during an interview with REIT.com at REITWeek 2012: NAREIT's Investor Forum at the New York Hilton.

The multifamily sector has witnessed a significant boost from the housing crisis, up 8.20 percent in 2012 alone. Ric Campo, chairman and CEO of Camden Property Trust (NYSE: CPT), told REIT.com that his company is ramping up its development pipeline and he still thinks the sector has room for growth.

"The fundamentals in our business right now are incredible," Campo said. "They're about as good as they get right now. The position from a supply-and-demand perspective is really good."

Jones said the two major concerns affecting the outlook for commercial real estate in the second half of 2012 continue to be the financial crisis in Europe and weak hiring numbers at home.

"The failure and break-up of the eurozone and a Greek default would be pretty dark scenarios that are weighing on investor sentiment," he said.

Jones added that the nature of the recovery has been slow across the board. "In many markets, there's still the backfilling of space from the recession. We continue to see progress, but it's been really slow," he said.

Sam Wald, portfolio manager with Fidelity Investments, agreed that the uncertainty surrounding Europe and the fiscal situation in the United States are dominant themes in the broader market and present challenges for REITs, too. However, Wald did say the search for yields has been one of the biggest drivers of REITs' performance so far this year. He pointed out that the average REIT dividend yield has been in the range of 3 percent to 4 percent.

"The dividend payout ratios are very low, meaning that dividends are very safe," he said. "Also, we feel that dividends should grow from here as earnings recover through the cycle."