REITs Continue Accumulating Capital

While REITs continue to accumulate capital through both the equity and debt markets, that doesn't mean they're about to go on a buying spree, according to Jonathan Morris, managing director with Jones Lang LaSalle.

In a video interview with REIT.com at the NAREIT headquarters in Washington, D.C., Morris discussed REITs' approach to the capital markets in the current environment. He noted that REITs continue to benefit from their access to capital, in particular through the equity markets. However, Morris said more REITs are tapping the unsecured debt markets. With rates on unsecured debt nearly equal to those of mortgages, REITs are using unsecured debt to pay off maturing loans.

"So they're reducing their overall debt to market cap, but they're doing so by virtue of unsecured loans," Morris said. He speculated that through the de-leveraging process, REITs will cut their debt to market cap ratios down to a maximum of 45 percent.

Morris said he expects to see a number of REITs use their fresh capital to make acquisitions. That won't mean a massive upswing in deal-making, though.

"I think the perception is that if public REITs raise a significant amount of money, the next day they're going to be in the market buying assets," Morris said. "That's just not the case. They have a programmatic approach to buying properties. The fact that they've got an additional amount of capital doesn't translate into aggressively buying a whole bunch of new buildings for very low cap rates."

Morris also offered his thoughts on trends in the suburban markets. He commented that suburban markets have been negatively impacted by the flight to urban areas. Rising gas prices are among the factors driving people to return to cities, he said.

"The cost of transportation and the time allocated to transportation is beginning to impinge on people's lives and their budgets, so clearly the gateway cities are benefiting from the return to the core," Morris explained.

Some players in the market are angling to take advantage of significant discounts on suburban assets as a result.