In the latest episode of the NAREIT Podcast, Michael Hudgins, managing director and global strategist with EII Capital Management, discussed some of the major stories in real estate investment at the moment, including REIT valuations, the demand for real estate and the impact of secular factors on the U.S. real estate market.
Hudgins reported that his clients are expressing skepticism about REITs’ high valuations and questioning if REIT returns still have room to run. However, he cited multiple reasons suggesting that line of thinking is misguided.
“Core sectors—apartments, industrial/office and retail—are trading around their” net asset values [NAVs], Hudgins said. “The core sectors…are giving what I call a ‘good signal.’”
Looking ahead, Hudgins estimated that REITs that own high-quality properties could offer returns of 8 percent for the year. “There’s absolutely upside,” he said.
Regarding the real estate market cycle, Hudgins noted that demand for real estate bears strong correlations with the gross domestic product and employment rates. Additionally, cash flows tend to grow later in the cycle, according to Hudgins. Those factors currently suggest REITs will come on strong in the second half of the year, he said.
“I still believe that there are some really good days ahead of us,” Hudgins remarked.
Looking at some of the broad, secular stories impacting the REIT market, Hudgins said he expects healthy demographics and renaissances in energy and manufacturing to drive REIT returns higher.
“Most importantly, REITs over the mid to long term act like real estate,” he said. “So, I’m convinced they are a great way to access the real estate market in the U.S. in a liquid fashion and to tap directly into that U.S. story.”