Growth in a Sluggish Economy Challenges REITs

NEW YORK CITY-Riding high following the downturn, REITs nonetheless need to focus on growth as always, Simon Property Group’s David Simon said Tuesday at REITWorld 2010. The challenge, he said, is achieving that growth amid the current economy, which he characterized as “a slow, slow recovery.”

Added Simon, chairman and CEO of the mall REIT, “I feel great about our spot, but how are we as an industry going to do it?” His comments dovetailed with an observation from fellow panelist Richard Saltzman, who noted that while overbuilding hasn’t been as prevalent this cycle, there’s a shortage of consumer-driven demand for the real estate. “It’s unclear how the demand is going to grow from here,” said Saltzman, CEO of Colony Financial.

Earlier in Tuesday afternoon’s panel discussion at the Waldorf-Astoria here, titled “REITs at 50—A Panoramic Perspective,” Simon identified another challenge: “We need a broader equity base.” He said one disappointment over the 17 years since his company went public has been the general reluctance of pension funds to make indirect investments via REITs rather than direct investments. Although going the indirect route provides better returns, Simon said, “we haven’t won that battle.”

However, Simon also made it clear that the battlefield, at least for public REITs, is less treacherous than it was following the savings-and-loan crisis. “What happened in real estate in the past year and a half was a day at the beach compared to the early ‘90s,” he said early in the discussion.

For privately held companies, though, it’s still tougher sledding, Simon pointed out, but noted that for public and private companies alike, the real key is the quality of the real estate. He shared the panel with another retail REIT pioneer, Milton Cooper of Kimco Realty Corp., and the two men who helped take Simon Property and Kimco, respectively, public: Martin Cicco, managing partner of Evercore Partners, and Saltzman.

Cooper took the view that as far as commercial real estate is concerned, “the crisis is gone.” In contrast to the market’s late-2008/early-2009 trough, debt and equity are once again available, although buying opportunities haven’t been plentiful.

If the federal government had not flooded the market with liquidity via quantitative easing—a process it’s undertaking again with its recently announced plan to buy $600 billion of Treasuries—the buying opportunities would have been more plentiful, said Simon. He added, though, that if the government hadn’t acted as it did, “only the strong would have survived.”

Cooper did see one opportunity for many in the sector: using the REIT vehicle to recapitalize entities that hold a lot of real estate, in the process giving REITs “maybe a smidgeon less cost of capital.” Cooper added, “We as REITs may have to become one-stop shopping” for smaller businesses that can’t get loans, possibly even replacing banks in this capacity, “as long as we don’t screw up the underwriting.”

Formation of capital is going to become more difficult for companies on both sides of the public/private divide, Satzman said. The public markets provide an easier road to achieving that, hence the lineup of impending IPOs. However, Cicco pointed out that “gatekeepers will be skeptical” until some of the IPOs get done and perform.  

Panelists saw some reality checks coming to both REITs and investors in the near term. Lately, Cicco said, the distinction between “haves and have-nots” among REITs was becoming clearer. He said many management teams will need to consider what the appropriate size for their businesses really is.

Simon also expressed concern that many investors still focus on “buying the dream” rather than sticking to actual results. “I’m a results guy,” he said.