Posted by: BayAreaComRE | February 2, 2010

Green Shoots in the CRE Market May Point to REITs

REITs have been well positioned to acquire distressed assets, as the Wall Street Journal reports, because they have been able to raise more money that the private sector.

That being said, before investors sprint back to REITs, we want to highlight some of the trends that could impede this economic green shoot. Commercial properties may not have hit bottom, especially in office, and higher vacancy and lower rent-roll means higher landlord concessions and lower profit. San Francisco is nearing the bottom in office rates, but 2010 lease roll-overs threaten to stagnate absorption.

“Certain asset types have definitely hit bottom, but in others, like office, I see a lot of headwinds. And I would argue that office values have not hit bottom,” says David Bernhaut of Cushman & Wakefield Capital Markets Group in a GlobeSt article. He believes multi-family and industrial have reached the bottom.

REITs (Real Estate Investment Trusts) exemplify the changing landscape of the real estate business, highlighted in this wsj article. While in previous years, investors bought into REITs to earn steady gains above the stock market, there is a strong “correlation of real-estate stocks with the broader market.”

Even though future interest rate hikes and decreased property values expose REITs to more pain, there have been clear signs of a recovery.

“Perhaps most important, REITs have already soared from their lows. The Dow Jones Equity All REIT index, which lost three-quarters of its value between February 2007 and March 2009, has doubled since last spring. REITs now trade at a roughly 20% premium to the net value of their real estate, research firm Green Street Advisors estimates.

To bulls, that premium is deserved given hopes that commercial-property values will rise as the economy recovers. Feeding that optimism: Publicly traded REITs, unlike many private rivals, have raised debt and equity to strengthen their balance sheets, giving them the cash to buy distressed properties.”

NAREIT Vice President of Research and Industry Information Brad Case says the decline in REIT returns in January is not cause for concern and that conditions in the commercial real estate market have REITs well positioned for long-term growth. “Even in the longest and strong REIT upturns there are months with negative returns,” Case says. “But REIT investors are not looking at one-month returns but what they are likely to be seeing over the next several years.” Key to that long-term growth will be the health of the banking sector, Case says.

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