It looks as though the REIT market is poised for growth. A recent report by global consulting firm Mercer titled "Recapitalization and Recovery in the REIT Market," says that REITs will be able to take advantage of the best investment market in 20 years."Over the last two quarters there has been an incredible amount of new equity issuance in the REIT market …. over $17 billion in capital raised," says Michelle Reuter, senior associate in the manager research division of Mercer Investment Consulting, Inc. in Chicago, who co-authored the report.
Bryan Case, VP, research and industry information for the REIT industry group NAREIT, agrees that the "outlook for REITs hasn't been this positive since 1991, at the start of a bull market that lasted seven years during which REIT returns averaged more than 20% per year." Just as in 1991, Case says, "over the next few years we're going to see a tremendous number of high-quality properties on the market at screaming-bargain prices, thanks to private-side real estate investors who got themselves in trouble by paying too much for properties, and using too much debt in the process, during the combination debt and asset-price bubble."
REITs, Case continues, "didn't share in that mass hysteria, and because of that they're practically the only real estate investment managers that investors will trust with their money now. REITs have provided very strong returns over the past 30-plus years even through the downturns, so they have access to capital now and can buy; other investment managers produced poor returns even during the bull market, so they don't have access to capital now and will have to sell."
Washington Bureau Chief Melanie Waddell spoke with Mercer's Reuter by telephone in early November.
You say the REIT market is in the beginnings of a growth stage, but that it's different than the REIT cycle of the 1990s.
The biggest difference is that [the one in the 1990s] was born out of an oversupply problem where everyone was gung-ho and building rapidly. In this cycle, the problems have been born out of the capital markets; we haven't seen the same oversupply problem. That's not to say that we might not, because if the housing market and consumer spending markets don't come back, then the oversupply problem definitely could exist.
When talking about the downturn in the commercial real estate market–how does that affect this growth stage?
There is such a credit crunch in the real estate market, so a lot of the private real estate investors and private real estate funds don't have capital. So there has been a standstill in the transaction market because no one has money with which to buy any new properties. No one is selling, either. There's been a really wide bid/ask spread. There's a lot of anticipated distressed opportunities in the commercial real estate market; one of the big questions is when [those distressed properties will] come to market.
There hasn't been pressure from banks for foreclosures, a lot of them are more willing to extend loans, so the distress has not come to fruition yet, but when it does we think that REITs are going to be in a unique opportunity because over the last two quarters there's been an incredible amount of new equity issuance in the REIT market–over $17 billion in capital raised. Now all of these REITs are sitting on a lot of cash. In the short term, most of the opportunities are going to be on the debt side just because the distressed acquisitions aren't out there yet. Some well-capitalized REITs could be in a position to take advantage of debt transactions and will ultimately help to alleviate the ominous debt maturity problem in the commercial real estate market.
But in the long term we think the distressed acquisitions are going to be the way in which REITs can take advantage of the unique dislocation in the market.
