Investors, bankers and real estate investment trust executives expressed cautious optimism as they gathered in New York recently to discuss commercial real estate prospects at this year's NAREIT Investor Forum.
Most said that real estate fundamentals continue to be healthy, with rents and occupancies in commercial properties remaining stable despite the weakening economy. However, many are less certain about the outlook, saying that much will depend on how deep and how long the economic downturn goes.
"Every day, we seem to be getting conflicting news on the state of the economy," said Steven Wechsler, president and chief executive of the Washington-based National Association of Real Estate Investment Trusts Inc.
Clearly, he said, the cost and availability of capital and credit are critical. But "the overriding question is the overall strength or weakness of the economy, and the credit environment will affect that," Mr. Wechsler said.
Martin Stein, chairman of NAREIT and chief executive of Regency Centers Corp. of Jacksonville, Fla., said that it is a different world than it was a year ago, when gold was selling for $660 an ounce, The Bear Stearns Cos. Inc. of New York was trading at more than $150 a share, oil was $64 a barrel, private equity was abundant, and the consumer confidence index was at 108 — almost twice its current level.
Back then, consumer spending was robust, and companies were expanding. But the subprime debacle and meltdown in the financial services sector ended the good times.
REITs were sold off along with the financials late last year. Investors pulled $6.4 billion out of real estate mutual funds in 2007 but have started returning this year, pouring back almost $2 billion in the first quarter alone, Mr. Stein said.
"Many investors who put their money into the financial services sector found to their dismay that companies they invested in [were in fact] invested in opaque, illiquid, highly leveraged instruments whose risks were significantly misjudged," he said. "This spring, many of those investors came back to REITs," lured by commercial real estate's transparent, liquid nature, Mr. Stein said.
REITs are long-term plays.
Equity REITs outperformed the Standard & Poor's 500 stock index in seven of the past eight years, according to NAREIT. Still, uncertainty remains over how much worse the economy will get and for how long, a situation that ultimately could affect real estate demand, Mr. Stein said.
"I think we're in for a long and difficult environment," said John Bucksbaum, chairman and chief executive of General Growth Properties Inc., a mall REIT based in Chicago. However, he said he hasn't seen a surge in requests for rent relief from tenants or massive store closings, as cynics have predicted — at least not yet.
Escalating job losses, global economic deterioration and continued energy price spikes could push the economy into a deep recession, said Ken Rosen, chairman of Rosen Consulting Group, a real estate market research firm in Berkeley, Calif. "Oil is the wild card in all of this" because it affects global markets, he said.
Mr. Rosen expects borrowing costs to rise even higher in the next year and sees considerable risk of an even bigger economic downturn in 2009. For now, REITs' long-term leases and low leverage will help them weather the downturn, he said.
Richard Berner, managing director of New York-based Morgan Stanley, is more bullish. Although he predicts both higher volatility and inflation over the next 12 months, with continued concerns about credit quality, he is hopeful for slightly improved economic conditions next year.
Mike Fascitelli, president of Vornado Realty Trust of Paramus, N.J., said he isn't worried about expiring leases in his company's key markets, which include Manhattan and Washington, since rents have spiked significantly since the original leases were signed between 1998 and 2001. He estimates that the company will capture an additional $500 million in rental income just by bringing expired leases up to current market rates.
"Even if rents get kicked down $5 or even $10 [a foot], we're going to be just fine," Mr. Fascitelli said.
With the debt markets in turmoil, Vornado has built up $1.5 billion in extra cash and a credit line of $2.6 billion, which it will use for opportunistic investing.
At upscale mall owner Taubman Centers Inc. of Bloomfield Hills, Mich., "We're very cautious about the future," said Robert Taubman, chairman and chief executive.
Although sales growth remained healthy at his malls in the first quarter, he said, rising oil and food prices mean that consumers have less money to spend. Also, as housing prices continue to tumble, the homeowners' net worth declines, making them more cautious about spending.
Taubman Centers has been able to raise equity in the capital markets to finance the company's business, Mr. Taubman said, even though the credit markets remain in turmoil.
The markets hardest hit are ones that had the sharpest run-up in home prices and now face the biggest corrections: California, Arizona, Nevada and Florida, said Milton Cooper, chairman and chief executive of shopping center REIT Kimco Realty Corp. of New Hyde Park, N.Y. Retailers that cater to homeowners, such as furniture, appliance and linen stores, have been hurting the most, he noted.
E-mail Janet Morrissey at [email protected].
