After peaking in the fourth quarter of 2007, new construction in the REIT industry decreased sharply over the next two and half years. Steven Marks, managing director with Fitch Ratings, attributes that decrease to a demand slowdown coupled with REITs desire to preserve liquidity and reduce leverage. Although it has been slow and primarily concentrated in the multifamily and industrial sectors, Marks says sees the growth as a signal that REITs are organically building their portfolios.
"Cap rates are so low and valuations are so high that it's coming down to a build-versus-buy decision for many," he said in an interview with REIT.com.
Multifamily Sector Showing Most Growth
With historically high number of renters looking for apartments, multifamily REITs in particular are looking to grow more broadly, said Marks, adding that acquisitions have become difficult for them.
Camden Property Trust (NYSE: CPT) is one of the multifamily REITs that has reinvigorated its development pipeline. During a video interview with REIT.com at REITWeek 2012: NAREIT's Investor Forum, Ric Campo, Camden's chairman and CEO, said the company currently has a pipeline backlog of approximately $500 million.
"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."
No Credit Risk
Despite the uptick, Marks said development remains fairly muted and is not a meaningful credit risk for equity REITs. He added that the development pipeline remains a small piece of underappreciated assets.
"I guess to put it in context, it's significantly down from the peak and the vast majority of development is concentrated in the multifamily sector," he said. Marks noted that the development pipeline for publicly traded REITs is currently 55 percent smaller than its peak level in 2007.
Aside from the multifamily and industrial sectors, the report noted that office development remains slow but steady, with the bulk of new development projects taking place in top-tier markets such as New York. Retail development remains is expected to remain limited, the report said, due to uncertainty over tenant demand and online sales.
Health care REITs have been the least active developers among all major sectors during the past 10 years, according to the report. Fitch said it expects the sector to continue to consolidate and grow through acquisitions as opposed to new development.