MIAMI—Where are the opportunities and challenges for commercial real estate REITs? What's the long-term outlook for the REIT sector?

We caught up with Jacob Gehl, co-founder and managing partner of Blueprint Healthcare Real Estate Advisors, to get some answers to these questions. Be sure to check out part one of this exclusive interview, “REIT Sectors to Watch in 2014 and Beyond,” for Gehl's take on how long the REIT run will last.

GlobeSt.com: What challenges do you see for commercial real estate REITs?

Gehl: REITs may see downward pressure on the spreads between their revenue streams (relatively fixed) weighted average cost of capital in a fluctuating interest rate environment. REITs have several methods of offsetting such risk such as staggered leases, rent bumps, diversification, and RIDEA structures.

GlobeSt.com: What advantages do you see for commercial real estate REITs?

Gehl: REITs benefit from tax-efficiencies while appealing to investors focused on dividends. These firms tend to benefit by economies of scale given their diverse portfolios and large holdings. The REITs have a lower cost of capital than private equity. The lowest cost of capital wins.  

GlobeSt.com: Are you seeing a lot of new REITs forming now or are they declining?

Gehl: Private and or non-traded REITs continue to be formed rapidly as yield-driven investors demand increases.  Typically, these REITs raise money through the retail broker dealer network.  Additionally, publicly-traded niche-focused REITs such as Aviv can differentiate themselves from the general REITs in order to get their IPO's off the ground.

GlobeSt.com: What's the long-term of picture for REITs? What lies ahead?

Gehl: As long as the REIT's can figure out ways to trade away from interest rate risk through rent bumps and TRS structures in order to capitalize on operational upside, REIT performance should be strong, at least in the subsectors where the properties are operationally heavy such as healthcare, student housing, data centers, and hospitality.

GlobeSt.com: Any closing thoughts?

Gehl: In our opinion The REIT story has taken an unexpected turn with private REITs. They have emerged on the scene in a big way, and they are compressing cap rates.  

We question the durability of their dividends, and we find it a little troublesome that there are no institutional holders of private REIT stocks. But we at Blueprint feel that the average retail investor looking for retirement income and exposure to real estate will continue to allocate a portion of their retirement nest egg into REIT stocks.    

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