Fallout from the credit crunch and housing market decline will make REITs more volatile over the next year or two, but they will be in a strong position going forward, according to a panel of industry experts at the National Association of Real Estate Investment Trusts annual convention in Las Vegas on Wednesday.
Anyone considering putting fresh money into the market might want to rethink that decision, says Matthew Ostrower, managing director of New York-based financial services firm Morgan Stanley. The reason isn’t fundamentals but the psychology that’s spilling over from the single-family market, he says, adding that there has never been a cycle like this without overbuilding.
“There are going to be some bad things going on in the credit market that will affect our asset class in a negative way,” Ostrower predicts. “We are all sitting here in the capital market and it seems like single family has been going on for a while, but I am telling you it has just begun for the average investor out there.”
REIT investors have been hoping for more mainstream status that is “less about the real estate cowboy” and more about the thoughtful institutional investor, according to Ostrower. But he says this is a byproduct of being more mainstream since inclusion in the S&P 500. “It’s more correlation and maybe even more volatility to some degree,” he says.
Paul McEvoy, senior managing director of DRA Advisors, says Ostrower’s concerns about volatility are interesting considering that the industry believed that being more transparent and sharing more information would result in less volatility. Real estate investments have had a tremendous run over the past decade but there are short-term concerns and he expects it to be very choppy for the next 18 months.
“There is a price correction in private real estate the degree which will be determined by how bad the so-called credit crisis is,” McEvoy says. “I think there is a lot of uncertainty on where this mortgage crisis is going to play out. We are not even halfway there. This is going to have a huge impact on the economy and credit capital.”
Ostrower notes, however, that the industry can be in the middle of a “secular trend upward’’ and still have a significant correction in real estate values.
REITs haven’t been able to make acquisitions and institutional capital is sitting on the sidelines waiting to buy REITs again, says Mark Decker Sr., managing director of Robert W. Baird Co. With CMBS not functioning and the equity market and banks tightening credit, something has to give, he adds.
“One or two will have to be altered before we see an active buyer-seller market,” Decker says. “I think cap rates are a little low and I think they will go up 50 to 150 basis points in the next five years.“
James Corl, executive vice president of New York-based Cohen & Steers Capital Management says he sees interest from petrodollars, foreign investors and other less levered players. The institutional demand is there, he says.
“Although the levered players are backing away, the more equity driven players are coming in to supplant,” Corl says. “A seven to eight total return looks attractive for pension funds compared to the stocks and bonds and cash.”
That doesn’t mean there won’t be a reasonable rate of return, Ostrower says, but he adds that all bets are off with the economy. In today’s high valuation market with the credit crisis in the forefront, “these things can turn vicious,” he says.
“I am pretty bullish over the long term and especially bullish about REITs,” Ostrower says. “I think it’s the right way to own real estate. I think REITs are in the early stages of the evolution over many years, and I expect them to take a significant share from the private markets and end up owning most of the institutional quality real estate in the U.S.”