REITs Have the Upper Hand in Recovery

NEW YORK CITY-When the dust clears from the recession, REITs will have a competitive advantage in the commercial real estate industry, said speakers yesterday here at NAREIT’s REITWeek convention in the Waldorf Astoria hotel. That advantage is access to the public markets, an option not available to private firms involved in real estate.

So far this year, REITs made 45 public offerings totaling $14 billion, according to NAREIT. Though that number doesn’t cover the $40 billion in REIT debt due this year (not to mention the $80 billion due in 2010 and 2011), it’s a more promising fate than non-public firms, which are dealing with banks that won’t lend and private-equity funds that aren’t spending.

“The commercial real estate industry has a huge mess to deal with,” said Mike Kirby, chairman and director of research at Green Street Advisors, speaking during a morning session on REITs and investing. “The only source of capital that can fill a void like that is the public market.”

That being said, there is still a lot of uncertainty about when and how a recovery will take place. Panelists weren’t exactly hopeful when discussing the Fed’s plan to expand the Term Asset-Backed Securities Loan Facility (TALF) to CMBS loans. “We can’t run our businesses depending on TALF,” remarked Michael Fascitelli, president and chief executive officer of Vornado Realty Trust.

In addition, there is evidence that REITs’ vacancy and rental rates continue to deteriorate as the economy remains in a rut. “The fundamentals are going to be as big of an issue that the finance issue has been in the last six months, predicted Kenneth Rosen, chairman of Rosen Consulting Group. “This job loss has begun to filter in the real estate sector as a big negative. We can’t really say there’s light at the end of the tunnel.”

Looking at individual sectors, Rosen commented that hotels are in a “freefall,” retail is stable only if you have the right assets in the right locations and multifamily is the “prettiest horse in the glue factory.”

At least one company presenting during REITWeek, industrial REIT ProLogis, was hopeful about demand for the future. The firm is starting to see build-to-suit demand by firms that need space, like third-party logistics companies and retailers, said Walter Rakowich, its chief executive officer. “There’s going to be a bust out in terms of need for space in this country because no one is building anything today,” he commented.

But there were few answers at the conference as to when a recovery will take place or when the industry will reach “normal” levels. “What’s normal?” Fascitelli asked. “It’s certainly not going back to 2007 or 2006 for a while.”