Neuberger Berman Fund Manager Says Higher Interest Rates Should be Good Sign for REITs

Steve Shigekawa, managing director at Neuberger Berman, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

Shigekawa noted that the biggest surprise for the REIT industry during 2014 has been the decline in interest rates.

“At the beginning of the year, the 10-year Treasury note was 3 percent. At the time, the consensus view was that interest rates would go higher, which would be a headwind for the REIT market. What we’ve actually seen is the opposite,” he observed.

Interest rates can impact the real estate market in the short term, but longer term the market is driven by real estate fundamentals, he pointed out.

“Going forward, as long as we see increased higher interest rates driven by economic growth and job growth, that should be supportive of demand for commercial real estate,” Shigekawa said.

In terms of specific real estate sectors to watch in 2015, Shigekawa said he likes the prospects in the office segment.

“We think most office markets have turned the corner and we would expect that they’d see continued increases in occupancy and rental rates,” he said.

Shigekawa observed that, so far, San Francisco and Houston have been the leading office markets in the recovery.  Looking ahead, cities to watch include New York and Los Angeles because they have “more diversified demand drivers,” according to Shigekwa.

In addition, opportunities exist in select Sun Belt markets, where job growth will be above the national average and there is still very little new supply, he added.

Shigekawa also reflected on stories that he will watch closely in 2015.

“The one thing that we think about often is whether or not we see continued strength in the private market for commercial real estate,” he said. “So far, our institutional investors, both foreign and domestic, have shown strong demand for high-quality assets, typically assets similar to the ones that REITs own.”

That level of demand has been favorable for the market in terms of increased property prices and lower cap rates, Shigekawa explained.  “Going forward…a key issue is whether or not we continue to see that strong demand from institutional investors.”