SPECIAL REPORT: REITs Seen to Dominate Real Estate Markets Again as They Did in Early-1990s

By Keat Foong, Executive EditorNew York—REITs will be the top players again, much as they were in the 1990s, when the markets move forward in the next few years, predicted speakers at National Association of Real Estate Investors’ (NAREIT) REITWeek conference held in New York City this week. Speakers at REITWeek suggested that REITs will be the few players in the commercial real estate market that will have access to capital, and that they could take advantage of their superior capital-raising abilities to accumulate real estate assets at distressed prices.  “Public companies will have the opportunity to dominate the next cycle of the real estate business,” said Thomas Carr, managing partner of Federal Capital Partners, at a panel discussion. “The next three to five years will present opportunities for public companies.” Mike Kirby, chairman and director of research  at Green Street Advisors Inc., suggested that large numbers of mortgages maturing in 2010 and 2011 will have difficulty obtaining refinancing, though in some cases, lenders will provide some forbearance and/or convert the debt to equity.“[The assets] will need an enormous amount of equity to come in,” said Kirby. The private equity markets do not have access to capital, or may not be willing to invest, and pensions are not increasing their allocations in real estate. There will be a “capital vacuum,” predicted Kirby. “The only source of capital will be the pubic markets.” Kirby said that the public markets, including its cost of capital, will be the drivers of the commercial real estate markets in the near future.  Carr and Kirby were speaking at a panel discussion entitled “The REIT Approach to Real Estate Investment.” The moderator was Michael Graziano, managing director at Goldman, Sachs & Co. Panelists also called for more conservatism in real estate investing. Hamid Moghadam, chairman abnd CEO of AMB Property Corp. said that “real estate has a huge private market on the side that is historically highly leveraged.” “No one is prepared to tell their investors that real estate is a low-teens business,” he said. The only way they can deliver that kind of return is by “cranking up the leverage.” Kenneth Rosen, chairman of Rosen Consulting Group, concurred. He said that for REITs, 6 to 7 percent return on assets is adequate return, and that any percentage higher than that is produced by higher leverage and risk. Carr added that “Anytime there is too much cheap money in the hands of real estate people is dangerous.” Kirby said that REITs are meanwhile making good progress fixing their balance sheets, and said that he would not be in a rush to acquire distressed properties if he were a CEO. “The distress is not here yet.” He said there will be a lot of lender forbearance in the beginning, and that the problems of distressed properties could play out over years. Kirby also predicted that there will be many more IPOs, since the public markets are paying more than the private markets. The public markets, he emphasized, will be major players. At the opening luncheon, Debra Cafaro, chairman, president and CEO of the healthcare REIT Ventas, noted the active level of IPOs recently, and said that “the demand for REIT equity is incredibly robust.” REITs are enjoying “an improving equity market,” she said.“With confidence returning to REIT debt and equity markets, the REIT picture looks brighter and almost certainly more clear,” said Cafaro. [Click here to view video of Commercial Property News’ interview with NAREIT Economist Brad Case during REITWeek.]