NEW YORK CITY–Yesterday Blackstone Real Estate Partners VIII announced it had agreed to acquire Gramercy Property Trust for $7.6 billion in cash. This was, of course, a story about the vibrancy of the industrial real estate sector, especially as it followed by mere days Prologis' proposed acquisition of rival industrial REIT DCT Industrial Trust for $8.4 billion in stock.
But the Blackstone-Gramercy transaction is also a story about how cheap REITs have gotten, compared with private sector real estate. “We have been telling clients this for some time now and we're also doing analysis for clients on which REITs to take private because they are too cheap,” Hans Nordby, managing director of CoStar Portfolio Strategy, tells GlobeSt.com.
Simply put, in a base case economic scenario, using the forward yield curve to predict interest rates and assuming there is no recession, REITs look cheap, he says. Consider a REIT like Simon Property Group, which is trading at a 5.4 cap rate. An investor might find a few, but not many, regional malls trading at that level. Buying a REIT like Simon — theoretically speaking as the REIT is unlikely to be a candidate for sale — would therefore be cheaper.
This is not true of all asset classes, though. Industrial cap rates are priced in line with the private markets, Nordby says. “There's no arbitrage there with industrial rates so they're very much loved by capital.” Apartment rates are considered a little bit cheaper but not by much. Office rates, Nordby says, are cheap in the REIT sector versus the private sector, particularly suburban office rates. “I think some of those babies have been thrown out with the bathwater,” he says.
Another factor to consider: the perennial amount of dry powder waiting to be put to use. “So when you take the cornucopia of private capital looking to get placed, low private market cap rates versus higher public market cap rates, you put them in a bag and shake it out — public-to-private deals fall out the other side,” Nordby says.
But whatever wave of deals that happen — and Nordby does believe there will be more transactions occurring this year — they won't match the period in 2007 when a number of REITs were taken private including, most famously of all, the Blackstone Group's acquisition of Sam Zell's Equity Office Properties Trust for $39 billion. In many ways that deal was a special situation, if only because the REIT was steered by someone who wanted to sell it, Nordby says.
“That is not true of all public REITs anymore — many have management teams that don't want to sell. So you need the right people at the helm who are willing to sell.” Such leaders may be easier to find among the small and medium sized REITs that are not as well respected in the capital markets, he 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.
