REITs Continue Recovery in Slow Economy

Although the economic environment at the start of 2012 closely resembles the beginning of 2011, John Perry, analyst with Deutsche bank, says that commercial real estate is continuing its recovery despite less than enthusiastic economic growth.

Interest rates remain low, and REIT valuations are largely unchanged from a year ago, Perry pointed out in an interview with REIT.com.

"We think that the muddle along, low growth, low interest rate economic environment will continue," he said, adding that he expects REITs to do well in the current economy.

Perry pointed out that one notable difference in this year and last year during the same time is the European debt crisis. However, he added that strategists at Deutsche Bank expect a resolution to the crisis without systemic default.

"Absent an external macro shock, we expect U.S. commercial real estate fundamentals to further strengthen in 2012, which combined with stable multiples/cap rates and an average 3.5 percent dividend yield for the group, should drive 8 to 12 percent total return for REIT shares," Perry said.

When it comes to sector performance, Perry said a favorite property type remains class-A malls.

"Despite what looks like a lackluster new store opening environment, the limited new supply this year and in the next few years, combined with an ongoing flight to quality amongst the retailers, bodes well for the sector," he said.

Although major chain store closing announcements including Borders, the Gap and Sears may impact some retailers, Perry said the impact felt on some of the best and most productive retail centers will be very limited.

With virtually no new construction, a new supply of commercial real estate product will continue to be at low levels, with the exception of the apartment sector, according to Perry.

"We are going to continue to see new developments in apartments, because it's justified by the demand," he says.

Jobs are the primary economic indicator of the industry's recovery, he said. He added that so far, a modest amount of jobs created, combined with a limited new supply has helped to push fundamentals in the right direction. However, he added that economists are not expecting much more of an improvement when it comes to the job market in 2012.

"Our economists expect the unemployment rate to tick down to about 8.2 percent," he said. Currently, the unemployment rate is 8.5 percent.

Overall, Perry said REITs are still on solid footing, despite the soft outlook.

"I think there's plenty of reason to remain optimistic on the REIT space," Perry said. "Fundamentals continue to improve, balance sheets are good for the most part and dividends continue to rise."