Are you anticipating any broad shifts in the growth strategies employed by REITs?
Going forward, look for better, clearly defined portfolio strategies and external growth strategies that are less risky, along with generally more conservative financial policies.
We’re seeing REITs really hone their strategies because of a couple of things. One, you have share pricing that is either at a discount or a premium to net asset values. Two, you’re seeing some focus on shedding portfolios in certain underperforming markets and REITs taking advantage of development opportunities where they have a lower cost of capital than some of the private developers.
Real estate investors face many unknowns at this time. Will that inhibit activity in 2017?
I think it’s going to change activity. Some of the uncertainty relates to the debt that’s available. REITs will have opportunities where non-REITs maybe have challenges.
Given the $89 billion of commercial mortgage-backed securities (CMBS) maturing in the next 12 to 18 months, there are going to be opportunities with properties that are driven to the marketplace.
The opportunities will be with mixed-use development. It’s a strategy that’s very popular, but difficult to finance because of the many different components. We’re seeing REITs have the ability to either work in a joint-venture structure to create big mixed-use developments, or on a standalone basis.
We’re also going to see opportunities continuing with multifamily because the fundamentals are so strong. There are still certain markets that have enormous rent growth.
What are you anticipating in terms of REIT privatizations in 2017?
We’re going to continue to see privatizations as share prices trade at a discount to net asset value in certain sectors. We’ll see more privatizations as opportunities for yield become much more difficult and there is so much dry powder on the sidelines in the private sector. That level of pent-up capital requires buying whole companies or entire portfolios, and REITs make obvious and desirable targets for acquisition.
In addition to private equity funds, other potential REIT acquirers include sovereign wealth funds. European funds, for example, facing low yields on properties in Europe could step up U.S. privatization bids this year.
Whether or not publicly traded REITs decide to accept offers to go private in this volatile, cash-heavy environment depends on the sometime disparate goals of both management and shareholders. If shareholders feel the company will continue to generate significant earnings growth over time, going private isn’t the best alternative for them.
What are some of the prominent trends you expect to see this year?
We’re going to see a focus on some secondary and tertiary markets where there are strong fundamentals.
Secondary and tertiary markets can provide niche strategies by best-in-class, laser-focused operators who will create opportunities. Some popular niche strategies include student housing, senior housing and medical office. Allocating capital and investment to operators who are decade-long specialists in a particular sector and specific geography that has dynamic growth will be a good bet.
There are also going to be opportunities in the workforce housing space. B- and C-class multifamily properties have largely been neglected. Raising rents as appropriate, and acquiring these properties at a significant discount to high-end multifamily, will provide opportunities for yield.
David Kessler is a partner with accounting, tax and advisory firm CohnReznick and serves as national director of the firm’s commercial real estate industry practice.
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