Analyzing warehouse data, finding yield through new avenues and shifting real estate investment strategies—these were a handful of topics addressed by public REIT executives during last week’s REIT Week. Here is a breakdown of some of the key points made during the REITs’ presentations at the annual investor conference hosted by Nareit in New York City.
- Going vertical. Industrial has been a favored property type among investors and developers for some time. Where else can the sector go? Up. Prologis Inc.’s CFO Thomas Olinger said the company, the largest owner of industrial space in the world, is not only looking to have warehouses near large population centers, close to end users—it is also looking to build multi-story properties in places such as U.S. coastal markets, where land costs have escalated so much that adding more levels is the next logical step to making pricing work. Prologis is building one such facility in Seattle, where construction is expected to finish in the fall, and exploring other multi-story properties in New Jersey, New York, San Francisco, Miami and Los Angeles, Olinger said.
- Owning data. Prologis is also working to build systems and teams to better analyze the data that flows through its warehouses. Olinger said the company’s long-term goal is to potentially monetize the data to help its customers. The move would mark another step in the desire of some real estate owners to own and analyze the data their properties generate.
- Life sciences are gaining ground. For healthcare real estate owner Ventas, there has not only been a continued shift out of skilled nursing facilities, said Debra Cafaro, CEO of Ventas. There has also been a continued push to make inroads into life sciences properties, which resemble the medical office building segment of the company’s portfolio. Increasingly, Ventas has sought to minimize its seniors housing exposure, as the sector faces headwinds from oversupply, and has put an emphasis on continually diversifying its portfolio. In 2015, the company acquired a university-based life sciences business for roughly $1.5 billion, with the universities conducting life sciences research serving as anchor tenants. Some of those approximately 23 assets are located on campuses including Duke University and Yale University, said CFO Robert Probst, and the business has grown by 40 percent since. The goal is to continue to expand this footprint to new schools, doubling the business, and university-based life sciences outposts is the number one source of capital allocation for Ventas: “We’re well on our way to it, and the pipeline is rich,” he said.
- The cost of occupancy for retail tenants may not matter that much anymore. It has been reported that some brick-and-mortar stores are deducting online sales that end up as returns to their stores from their total sale amounts—reducing their overall occupancy costs. Incoming Macerich CEO Thomas O’Hern, who currently serves as senior executive vice president, CFO and treasurer, said this issue is blurring the once black-and-white metrics of sales per sq. ft. and occupancy cost as a percentage of sales. “We’re seeing cost of occupancy becoming much less relevant,” added Doug Healey, executive vice president of leasing at Macerich.
- Multifamily supply should decline next year, but may still be high. CEO of Equity Residential, a multifamily REIT, said the company, which has properties in the top urban markets in the country, has seen its pricing power diminish with the addition of new supply in some markets. However, there is still “extraordinary demand” for rental housing, and 2019 bodes better in terms of pricing, he added. “We know ’18 was the elevated supply. As we go into ’19, we will see the new supply drop down, but it’s not like you’re completely out of the woods,” said Michael Manelis, executive vice president of property operations at the company. This is because some of the supply from 2018 will not be delieverd by the end of the year—creating a lag—and the new buildings will face their first rounds of lease renewals as well. Still, Manelis said high demand is aiding absorption, allowing the REIT to maintain occupancy levels and raise rents. The company’s construction costs—which have risen by 5 percent to 7 percent in some markets—appear to be the biggest constraint on new supply, noted Mark Parrell, executive vice president and CFO at Equity Residential.