Brad Case, vice president of Research and Industry Information for Nareit, tells GlobeSt.com that REITs seven-year track record is the more significant development. "The real story is not what happened with REITs last year but what has happened to investors that have put their money in REITs for the last 30 years." He cites a hypothetical example in which an investor had put $10,000 in the FTSE Nareit All REITs Index the year President Gerald Ford left the White House. "Today it would be worth roughly $435,000. By contrast if that investor had put $10,000 in an S&P Index today it would be worth around $340,000."
Case says REITs performed well last year across all categories. The office segment delivered the highest returns, according to Nareit data, at 45.2%. It was followed by healthcare, at 44.6%; self-storage at 41%; and multifamily at 40%.
Case also points to the $438-billion market cap for REITs at year-end 2006, up 40% from a year ago, as further illustration of the industry's robust health. "You can't find a REIT sector that performed poorly," he says.
The drivers supporting REIT growth include strong commercial real estate fundamentals and the continuing flows of capital from all kinds of investors including institutional firms and pension funds, John Kevill, managing director with Jones Lang LaSalle, tells GlobeSt.com. "In general the real estate fundamentals are looking good and REITs are reflective of that," he says. For instance, Case adds, more and more 401K plans are increasing allocations to REITs in response to investor demand. "There are changes in the defined contribution world as well that are favoring REITs as investments."
Cedar Shopping Centers' CEO Leo Ullman is one industry player that is bullish on 2007 and 2008's opportunities. A self-managed REIT focused on supermarket-anchored shopping centers and drug-store anchored convenience centers in the Northeast and Mid-Atlantic states, the company went on a buying spree last year, acquiring nine properties totaling 1.6 million sf.
"We are looking at a very good year in terms of our development and redevelopment pipeline, which we think will be the hallmark of our company's growth," Ullman tells GlobeSt.com. "We expect to be adding some newly developed properties in this coming year and to joint venture with other firms for development opportunities." Cedar Shopping Center has previously announced its JV strategy; Ullman says it is possible it might conclude these contracts by Q1 and be in position to complete transactions by Q2.
Some investors and investment advisors, though, remain concerned about REIT valuations and some are in fact reducing their REIT allocations.
Chris Cordaro, CIO for Regent Atlantic Capital in Chatham, NJ, tells GlobeSt.com that REITs are dramatically overvalued. "We are cutting our allocations in REITs down to 1% of our portfolio. A neutral weighting would be 6%. In the past, we have been as high as 8%." Cordaro says that either the price of REITs would have to come down significantly for him to reinvest or dividends would have to get past the 5% benchmark.
Bill Staton, chairman of Staton Financial Advisors in Charlotte, NC, is another advisor who believes REITs are overvalued. Overall, he tells GlobeSt.com, yields today are historically very low while P/Es are running too high. Realty Income and National Retail Properties are two REITS that Staton does like as they fit in his investment criteria, which includes 10 straight years of higher dividends per share.
REIT investors and operators, for their part, are sanguine about the valuation concerns. "Critics have been saying that for some time, even as the market continues to favor REITs," Ullman says.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
