If commercial real estate is supposed to be in such bad shape, why are real estate investment trusts doing so well?
The answer, according to REIT fund manager John Wenker, boils down to liquidity.
“REITs have rallied this year off the theme of access to capital,” said Mr. Wenker, who manages a total of $2.5 billion in the real estate department for First American Funds Inc.
“The fundamental environment for commercial real estate is still fairly weak, but public companies with access to capital should do well, and REITS have rallied off that theme,” he said.
Among the portfolios Mr. Wenker manages is the $655 million First American Real Estate Fund (FARCX), which invests in publicly traded REITs.
“Since the beginning of March, more than 60 [REITs] have raised $20 billion worth of public equity, and a couple dozen more companies have raised $7 billion worth of unsecured debt,” he said.
Mr. Wenker said that many of the problems facing commercial real estate, including large-scale vacancies that have led to defaults, have been concentrated on the privately owned side of the business, where leverage was more prevalent during the boom cycle a few years ago.
“Most public REITs are forced to maintain lower leverage levels,” he said.
Going forward, Mr. Wenker said, the key is to focus on areas of “inelastic demand,” such as health care, storage facilities and office buildings that have long-term leases with credit-quality tenants.
One example of the extreme other end of the commercial-real-estate sector, he said, is hotels, which can reset prices on a daily basis, depending on demand.
In an improving economic environment, such pricing flexibility can be an advantage, but it can hurt the bottom line in downturns.
First American Real Estate typically holds about 60 REITs. Mr. Wenker currently likes Federal Realty Investment Trust (FRT) for its exposure to a high-quality demographic through select shopping centers.
Another REIT he currently owns is Mid-American Apartment Communities Inc. (MAA), which he described as a “well-run apartment company in the center of the country.”
The First American Real Estate Fund gained 22% this year through Monday, compared with a 21.2% gain by the S&P 500 over the same period.
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