Tighter lending standards and a slow-growth economy have laid the foundation for a positive outlook for commercial real estate, according to Rick Romano, manager of the $820 million Prudential Global Real Estate Fund Ticker:(PURAX).
“Right now, we're seeing occupancies improve and rents go up,” he said.
Globally, REITs are generating yields in the 4.5% range, which is more than double the yield of 10-year Treasury bonds.
The more appealing market environment comes as the National Association of Real Estate Investment Trusts hosts its annual conference in Dallas this week. Mr. Romano will be among the more 1,200 attendees at the event designed to showcase some of the more promising publicly traded real estate investment opportunities.
A key part of the agenda will focus on the “modern-era REIT,” emphasizing some of the lessons learned since the first major REIT public offerings 20 years ago.
“I'll be looking for something that is different from what the consensus is,” Mr. Romano said. “We'll be talking [to company executives] about fundamentals and looking at capital allocation plans, as well as areas where there might be some acquisitions.”
Recent signs of continued progress for the REIT space include some new debt issuance last week, suggesting a new source of revenue to fuel growth in the space. “Some of the bigger REITs tapped the senior-unsecured-debt market,” he said. “But we want to know if some of the smaller REITs are able to also issue debt.”
While Mr. Romano invests across the commercial real estate spectrum in his global fund, he said the apartment category has been among the bigger beneficiaries of the economic slowdown that began with the 2008 financial crisis.
Since peaking at nearly 70% a few years ago, the homeownership rate in the United States has fallen to around 65%, meaning there are more people looking for rental housing.
The historical average homeownership rate in the U.S. is 64%.
According to Mr. Romano, the standard industry calculation is that for every 1-percentage-point drop in homeownership, the demand for rental housing increases by 1 million people.
“It's very difficult to get credit, which — combined with the slower economy and a cloudy jobs outlook — have made the market for apartment REITs very strong,” he said.
The fund has a 45% weighting in North America, followed by 30% in Asia, 13% in Europe, 9% in Australia and 2% in Latin America.
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Although apartment REITs have been strong, Mr. Romano said he is finding attractive investment opportunities virtually across the spectrum.
In term of office space REITS, he said it is bifurcated between stronger local economies such as Dallas and San Francisco, and weaker areas such as New York and Washington, D.C., which are tied to the financial and public sectors.
On the retail side, regional malls generally are doing better than shopping centers, and the strength is holding up better on the luxury and deep-discount ends of the retail space.
“In some of the shopping centers, the difficulty is tied to the inability of smaller mom-and-pop stores to get credit,” he said.
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