Kenneth Campbell had a front-row seat shortly after the birth of the REIT industry, founding the first REIT-dedicated publication, Realty Trust Review, in 1970. In 1991, Campbell partnered with T. Ritson Ferguson and Jarrett B. Kling to form a boutique asset management firm dedicated to managing listed real estate securities. The firm, Campbell Radnor Advisers, would eventually become CBRE Clarion Securities. Campbell’s latest book, “Watch That Rat Hole and Witness the REIT Revolution,” offers a comprehensive look at the rise of the REIT industry and some of his most important life lessons. All royalties from the book will go to the BCS-YES Angel Scholarship Fund to aid at-risk youth in the Philadelphia area.
Other than size, how does today’s REIT industry compare with the landscape of 1970?
In 1970, the industry was dominated by Mortage REITs. The first issue of Realty Trust Review found that 24 Mortgage REITs, with about $1.2 billion of market value, accounted for about three-quarters of the total REIT industry.
Mortgage REITs of the 1970s were mainly short-term construction lenders: very few made long-term loans, and they proved to be unsustainable. Meanwhile, the Equity REITs of the 1970s wanted to be in all property types and locations. The assumption today is that the investor can pick and change their property mix almost at any time.
Where do REITs go from here?
I see Equity REITs plateauing at about 20 percent of the commercial real estate market within about a 10-year period.
There’s also no doubt in my mind that you are going to see new property types – what they are, I really don’t know. The new property types of the last few decades all seem to have been accepted very well by the investor group.
Net lease REITs are about 6 to 10 percent of the total net lease market, and that looks to me like a segment that could grow very, very substantially.
I also see growth from well-known private family developers. There are going to be generational leadership changes, so you’re likely to see a significant amount of those organizations come public. They’re going to be quite transformative for the market; it will be interesting to see if they get the pricing they want.
Ideally, how large a role should REITs play in an investment portfolio?
To my mind, real estate is 10 to 12 percent of the economy, and that’s probably a safe target for most investors, recognizing that the public markets represent only about one-eighth of the total real estate market.
How much attention should REIT investors pay to real estate cycles?
The flowering of the modern REIT industry has softened and attenuated the impact of the real estate cycle in two very important ways.
First, we’ve lowered debt leverage. When the REITs came on the stage in the 1960s and 1970s, the typical debt leverage was probably 75 to 80 percent. The net result was that in every economic downturn you had wide swathes of the commercial property sector going into bankruptcy.
Today, the effective leverage for Equity REITs is about 40 percent. The industry came through the most recent financial crisis with virtually no foreclosures of major buildings. To me, the fact that Equity REITs work on much lower leverage means that they can survive downturns.
Secondly, the REIT revolution has triggered an outpouring of sophisticated data. Full disclosure of the market status essentially holds down new construction. Everybody now has a better handle on supply and demand.
Of course you still pay attention to the cycle, but it has a lot less amplitude than it had in the past.