Take Five: Jon Cheigh of Cohen Steers

Rising interest rates, or even talk of rising rates, usually increases volatility in the real estate investment trust sector.
But that doesn’t mean that REITs can’t also benefit from rising rates, according to Jon Cheigh, executive vice president and portfolio manager at Cohen & Steers Inc., which manages $49.3 billion.
InvestmentNews: How concerned are you about the Federal Reserve tapering off its quantitative-easing policy?
Mr. Cheigh: Over the years, people have always looked toward REITs and rate sensitivity, and people are usually worried about it. There’s always some volatility around [Fed actions]. But all the Fed is really saying is if the economy stays reasonably healthy or stays the same, we will see higher rates.
InvestmentNews: What kind of impact on REITs should investors expect when rates are rising?
Mr. Cheigh: There’s not really a direct impact. It’s not as if the company’s earnings are impacted overnight, because most REITs have average loan maturities of five to eight years. It’s not like they have floating-rate loans on the balance sheets. But rising rates might have a small negative impact on their earnings. And by small, I mean maybe 1%.
An indirect impact of rising rates is that investors might start comparing the REIT dividends to other, more attractive alternatives.
InvestmentNews: How should investors expect REITs to compete during an improving economy when growth investments could become more appealing?
Mr. Cheigh: When we look at the history of REITs, they’ve done well in periods of an expanding economy. REITs don’t like low rates and bad growth. They want demand growth, because with more demand, more people are traveling and staying in hotels.
REITs want more people getting jobs and renting apartments. These are not just stable, static bonds. They will improve even more in an improving economy.
InvestmentNews: Does the re-emergence of the market for commercial-mortgage-backed securities represent a fresh challenge to the REIT market?
Mr. Cheigh: It’s not a fresh challenge, but it is a little bit of a double-edged sword. CMBS is typically a financing arm for private real estate players. And because it’s usually a financing source for more highly leveraged players, they do pose more of a challenge because they might be able to pay more for a property. So it does pose a challenge but also means that real estate values will continue to appreciate.
Ultimately, the REITs might not be able to grow as much through acquisitions, but the value of what they already own will grow.
InvestmentNews: Should investors draw any parallels between the REIT sector and the housing market recovery?
Mr. Cheigh: The question is actually a mirror image of a question I would get in 2008 when housing was going down and it seemed bad for commercial real estate. Today, with an improvement in the housing market, there are all the multipliers of an improving economy.
There will always be common drivers and some differences between single-family housing and commercial real estate. There are some overlaps between the two, but they are as different as they are the same.