Before REIT executives and investors convened in New York on Tuesday to hear presentations at the 2017 REITWeek, there was a lot of talk about the duration of the current economic recovery, now a little over eight-years-old.
The jobless rate just hit a 10-year low at 4.4 percent, and the economy added 211,000 jobs. The numbers not only beat estimates, but represent a rebound from the first quarter’s disappointing showing.
Strong job growth is just one reason the medium-term outlook for the U.S. economy is positive, according to Calvin Schnure, NAREIT’s senior vice president of research and economic analysis. For one, the larger economy is not overheated. The cyclical components of GDP, including construction of both residential and commercial real estate, business investment and cyclical components, and consumer spending on durable goods, were 24.1 percent of total GDP.
The REIT sector itself is still fairly healthy. Weighted average leverage ratios are at around 31 percent, the lowest level seen in almost 20 years. Every sector has benefited from the economic growth to a high degree, Schnure said. The logistics segment of the industrial sector, which has benefited from increased e-commerce activity and data centers are doing particularly well owing to America’s heavy use of technology.
In addition, several segments of the real estate sector are waiting to take off again, including homeownership. At this point the U.S. has about 4 million so-called shadow households—homes that would have been started by individuals striking out on their own instead of staying with roommates or family.
It turns out that the current economic recovery is looking good for its age, and every sector has been able to benefit.
“The economy has had the same momentum it has had for the last few years,” Schnure said.
Here are some major takeaways from day one of REITWeek:
- Kimco Realty executives say that e-commerce has impacted the REIT’s development line-up by encouraging more live/work/play projects. Company executives estimate that 75 percent of the actual land space on its properties is occupied by parking lots, while retail accounts for 25 percent. The company expects to continue developing mixed-use projects, creating spaces that attract traffic at all points during the day.
- Tenant demand continues to evolve at open-air centers. Grocery stores, fitness centers, food retailers, pet stores and discounters are among the types of tenants demanding space at Regency Centers’ properties, according to Martin E. “Hap” Stein, Regency’s chairman and CEO. Stein added that rent concessions are no higher than they have been in the past. Retailers are being rational from an expansion perspective. Company executives noted that the management team had been fielding more inquiries lately about whether the REIT would sell any properties it acquired in the Equity One merger. Stein noted that the latter’s portfolio actually offers significant opportunities to create value. In terms of how recent retailer bankruptcies might have impacted the company, Stein said bankruptcies in 2016 represented less than 1 percent of Regency’s overall tenant space. Of the stores that closed, 95 percent had been turned over to new tenants.
- In the industrial sector, the ‘Amazon effect’ can be good for business. While industry professionals continue to grapple with the effect that e-commerce is having on retail properties, there is some good news for industrial properties, particularly those that specialize in distribution. “Everyone is trying to catch up to Amazon,” said Philip L. Hawkins, president and CEO of Denver, Colo.-based DCT Industrial Trust, which specializes in bulk distribution and light industrial properties. As for importing, and concerns about a possible change in border adjustment tax policies, Hawkins noted that professionals are choosing to be vigilant about incorporating e-commerce into their business operations instead. “It is too early to read into the political discourse now,” Hawkins said. “I’m not sure anyone is putting too much money into anything coming out of D.C. now.”
- Houston will always be home for Weingarten Realty Investors—but some opportunities are simply too rich. “We love Houston and would love to buy more properties, but it is proving to be a challenge,” said Andrew Alexander, Weingarten’s president and CEO. In the 1980s about 30 percent of the company’s net operating income derived from properties based in Houston. That figure has shrunk to 16 percent currently. The company also noted that its transformation program in Houston has resulted in a portfolio that is resistant to market challenges. Population growth and a lack of completions in the last five years have created demand for high-quality, infill properties. Alexander also noted that aside from giving consumers experiences that the Internet cannot provide, physical stores can enable retailers to convert shoppers every time they return an item. “Free returns are a missed opportunity,” Alexander said. “The consumer ends up spending 130 percent of what she returns.”