Acquisitions, Not development, to Drive Majority of REIT Growth

11/21/2011 | By Carisa Chappell

When it comes to describing the current state of commercial real fundamentals, "strong" is too strong of a word, according to Ross Nussbaum, managing director and senior REIT analyst with UBS.

Speaking with during REITWorld 2011: NAREIT's Annual Convention for All Things REIT in Dallas last week, Nussbaum said there are a number of problems the market still has to deal with including Europe falling into recession. He said he would describe the recovery in the U.S. as "slow and gradual."

"If there was one area where I would be tempted to use the word strong, it would be multifamily," Nussbaum said. "Multifamily rent growth has been absolutely phenomenal over the last year to year-and-a-half. We do think that will continue into the next year."

When it comes to how REITs will most likely grow their portfolios, either acquisitions or development, Nussbaum said it all depends on the sector in which they operate.

"In the multifamily space we are seeing the REITs being quite active on development, which doesn't mean they are not acquiring, but they are finally at the point where fundamentals and the market rents do support new development," he said.

Nussbaum said in the other property types it is incredibly selective. For example, he said there are no regional malls, barely any new shopping centers and few, if any, new office towers being built.

"Ultimately it is really going to be an acquisition game for at least the next two years," Nussbaum said. "Then, once the demand starts picking up we will start shifting into more of a development cycle."

Nussbaum said the looming debt maturities in the commercial real estate market provide a mixed-bag for REITs. On one hand, he said REITs may be opportunistic and be able to take advantage of distressed debt maturities. On the other hand, he said if we have continued distress in the world then you have to wonder how aggressive the REITs will actually be because they may be paying more attention to their own balance sheets again and getting more conservative.

In terms of raising capital, Nussbaum said he expects more of the same in 2012 that we saw in 2011.

"The equity markets are absolutely open," he said. "The unsecured markets have been tougher on the debt side."

The CMBS market remains the big question mark, Nussbaum said. After stumbling this summer, he said the CMBS market is trying to claw back with some origination.

"I would say the biggest unknown as we go into 2012 is what is the CMBS market going to look like and is that going to be our friend or enemy," he said.