REIT Sectors to Watch in 2014 and Beyond

MIAMI—Some say now is not the right time for REITs—that it's time to reduce REIT holdings. Others say now is the perfect time. Who's right?

We caught up with Jacob Gehl, co-founder and managing partner of Blueprint Healthcare Real Estate Advisors, to get his take on the REIT run. In part one of this exclusive interview, we get insight into bumps in the road, which sectors Gehl thinks are performing better than others now and will in the future, and more.

GlobeSt.com: Some say now is not the right time for REITs—that it's time to reduce REIT holdings. Do you agree or disagree with that?

Gehl: As long as the Fed remains committed to quantitative easing we think that REITs will remain compelling. Boomers looking for retirement income will continue to buy dividend yielding stocks like REITs as long as money markets pay a half of a percent.

GlobeSt.com: In the last week of May, REITs began a multi-week correction that saw average share prices fall about 15 percent.  Was this a sign of something bigger or just a bump in the road?

Gehl: We saw the markets react to the fact that interest rates may rise. Higher interest rates put downward pressure on demand for REIT stocks. We think that the Fed has painted itself into a bit of a corner with QE. Having the fed step out of the market is the inverse of having an elephant jump into the bathtub. It is having the elephant get out of the tub and the water level plunge.  

GlobeSt.com: Are REITs in some sectors performing better than others—or will they in the future?

Gehl: REITs that can capitalize on operational upside can win. RIDEA structures allow REITs to diversify away from interest rate risk and pass through inflation to the end user of the real estate.

We feel that the sectors of the economy that are experiencing real estate growth are most likely to perform the best. It goes without saying that we at Blueprint are bullish on healthcare and healthcare REITs. We also think that the data center REIT story is compelling. The growth of Big Data represents a very interesting investment thesis.

GlobeSt.com: In 2007 and again in 2011, people were asking if the REIT run is over. That question is emerging again. Has the REIT run ever really ended? How has it evolved?

Gehl: Evolving is the right word. The run of the REITs is far from over unless there is a massive overhaul in the regulatory and IRS environment. Typically these groups are very sophisticated investors and increasing interest rates alone cannot stop the run.

GlobeSt.com: So how long will the REIT run last? Please offer more in-depth insights.

Gehl: Public REITs will continue to fare well. We have less confidence in the private REIT market. We believe that given the asymmetrical nature of this economic recovery the fed will not be able to exit buying bonds without causing collateral damage to the economy.  

I think the public REIT story will remain compelling longer than conventional. We have not sold any of our REIT stocks and do not intend to do so. We do think there will be consolidation in the REIT space.

Smaller REITs will be acquired by larger ones and private REITs will be acquired by public REITs. As an intermediary we are happy to transact with private REITs but we are not recommending them to our clients.

Be sure to come back to this afternoon's Miami edition for part two of this exclusive interview. Gehl will discuss the challenges and opportunities he sees for REITs in the months ahead.