REITs Playing Leading Role in Development, Deloitte Analyst Says

Bob O’Brien, partner and U.S. real estate services leader at Deloitte, joined REIT.com for a video interview at REITWise 2016: NAREIT’s Law, Accounting and Finance Conference at the Marriott Marquis in Washington, D.C.

O’Brien said he is seeing an increase in development activity for apartment buildings, office buildings, hotels and distribution facilities.

“REITs are playing a big role in development activity,” O’Brien said.

REITs are looking at development as a way of driving growth, particularly at a time when acquisitions are challenging, and they are using their strong balance sheets and access to capital to drive much of the activity, he added.  

“It’s still a challenging market for private real estate developers to get the financing, and REITs have been taking advantage of that,” O’Brien observed.

Meanwhile, O’Brien pointed to a renewed interest in India on the part of U.S. real estate investors, sparked by India’s market reforms and improved economic activity.

In addition, Mexico is one of the few emerging countries that is still doing well, and it is attracting U.S. investment as a result, according to O’Brien.

O’Brien also discussed how REITs are taking a closer look at their cost structure in order to boost the growth of funds from operations (FFO).

While REITs are generally benefitting from high occupancy levels, that limits their ability to drive FFO growth from occupancy improvements, he said. At the same time, with new development coming on line, rental growth looks more challenging in the next couple of years, O’Brien added.

Improvements to REITs’ cost structures are occurring in part as the result of changes in technology, more sophisticated procurement opportunities and the ability to outsource more smoothly, O’Brien said.

“REITs are finding real opportunities to drive costs out of their business and improve FFO growth,” he observed.