Real estate fundamentals continue to look encouraging across most property types, according to participants on a panel at REITWorld 2015: NAREIT’s Annual Convention for All Things REIT.
Ed Fritsch, president and CEO of Highwoods Properties, Inc. (NYSE: HIW) and NAREIT’s 2016 Chair, moderated the panel. Mike Kirby, chairman and director of research at Green Street Advisors, argued that 2015 “might be the best year ever in the last 25 years for fundamentals on a net operating income (NOI) basis.” If the current low, but positive, growth environment continues for the next five years, he said, “we should be happy. REITs will do just fine.”
Scott Schaevitz, managing director and co-head of Americas real estate banking at Barclays, added that he does not expect any disruption in fundamentals for the next two to four years. “It feels good, but I’d like to see more growth from the rest of the world,” he said. Sherry Rexroad, managing director at BlackRock, agreed that fundamentals look solid, with supply and demand in check.
Timothy Naughton, chairman and CEO of apartment REIT AvalonBay Communities, Inc. (NYSE: AVB), said he does not see many signs of imbalances. He estimated that the real estate market is somewhere past the halfway point of the current cycle.
As for possible disruptors to the current outlook, panelists pointed to threats of terrorism and a weakening global economy.
“Our biggest risk is getting dragged down by everyone else,” Kirby said. “We’re the beacon right now. Our real estate market couldn’t be healthier, while growth in most other places is faltering.”
Similarly, Rexroad said she worries “mostly about a global event working its way into our economy.”
Multifamily, Self-Storage, Data Center REITs Highlighted
Turning to specific REIT sectors, Naughton said he sees “compelling factors” in his own market segment, multifamily, particularly on the demand side. Rates of growth in jobs and the supply of new apartment units are creating pent-up demand, he said.
Kirby described the multifamily sector and top-tier malls as "buy-and-hold" investments for the long term. He also highlighted the continued growth of the self-storage sector, adding that there appears to be no slowdown on the horizon: “As a sector, it just keeps on giving.”
Rexroad, meanwhile, pointed to the data storage sector as an “off-the-beaten-track” area where M&A activity remains lively.
As for public and private market valuations, Kirby observed that Equity REITs are “pretty fairly valued.” Kirby said he recommends that investors increase their REIT allocations since most are “dramatically under-allocated” to REITs. According to Kirby, “if you’re not at a 10 percent to 15 percent REIT allocation, you’re probably light.”
For his part, Naughton noted that real estate equity prices are “more or less fair today. We’re not too far off NAV.”