REITs Seen Benefitting from Economic Recovery, Unleashing of Pent-Up Demand
The REIT sector has remained resilient throughout the pandemic and is ready to take advantage of the recovering economy and unleashing of pent-up demand that is expected to characterize the rest of 2021 and beyond, according to the NYU Schack Institute of Real Estate’s 25th Annual REIT Symposium: REIT Leadership in a Post-Pandemic World.
Adam Emmerich, partner at Wachtell, Lipton, Rosen & Katz, opened the symposium by making several predictions, including: work from home, or some version thereof, is here to stay; ESG is at an inflection point; 2021 will be the year of the “REIT mega deal”; and, the REIT universe will continue to expand.
In a panel titled The Bull Case for REITS Post-Covid, and How to Play It, Mike Kirby, co-founder and director of research at Green Street, argued that there is indeed a strong bull case for the industry at this time. “REITs have not looked this cheap in 15 years,” he said.
Kirby said it does appear that the stock market overreacted during the course of the pandemic. The recovery in REIT share prices “has been for the right reasons,” he said, given the “very favorable” economic news.
During a keynote lunch session, Prologis, Inc. (NYSE: PLD) chairman and CEO Hamid Moghadam, noted that a key development to come out of the pandemic is the realization that supply chains have been “so stretched and fine-tuned for efficiency that they have no resiliency.” The trend of declining inventories has “turned a corner,” he added.
And while the pandemic has accelerated the penetration of e-commerce, Moghadam said he expects there might be some leveling off of that penetration once the economy fully reopens. However, e-commerce will keep growing off of a higher base, he added.
During a fireside chat, Debra Cafaro, chairman and CEO of Ventas, Inc. (NYSE: VTR), said the broader economy is poised for a “break-out to the upside.” While the economy will benefit from increased infrastructure spending and pent-up consumer demand, corporate activity, such as business travel, is likely to stay muted, she added. Cafaro stressed that in order for the economy to reach its full potential, there must be a strong uptake of the new COVID vaccines.
Cafaro also commented on investment in life science real estate, noting that inflows into the sector have never been greater. For its part, Ventas invested $1.3 billion into the sector during the pandemic, she pointed out.
Meanwhile, Sam Zell, founder and chairman of Equity Group Investments, said getting everyone back to work is “very, very important.” However, he added that the process could be “difficult, and will operate in spurts.”
During a keynote lunch session on day two of the conference, Zell said there is probably still upside potential in industrial real estate given the scale of conversion to online business, while the office sector faces “significant over-supply.” Price discovery in the retail sector is likely to occur once liquidations begin—which will probably be in the next six to eight months, he predicted. “There’s a lot of over-priced retail,” Zell said.
Barry Sternlicht, chairman of Starwood Capital Group, also participated in the conference. Asked if capital will keep flowing in the real estate sector, he said that it would. “We’re available to produce yield in a world that’s yield-less.”
He also noted that there hasn’t been a lot of distress yet in real estate, given that rates are low and banks are not eager to foreclose. As the economy re-opens, Sternlicht expects to see more distress and sales.
Among other observations made during the conference:
- “The door is open for public to public (transactions), but not particularly wide open,” said Mike Kirby.
- Peer to peer equity mergers in the office space are not all that likely. The question, rather, is whether there will be take-private deals, said Boston Properties, Inc. (NYSE: BXP) CEO Owen Thomas.
- Victor Coleman, Chairman and CEO of Hudson Pacific Properties, Inc. (NYSE: HPP), said the REIT’s studio assets are benefitting from the “voracious appetite” for content, which is at a “pinnacle.”
- Investors want growth, said Mary Hogan Preusse, founder and principal of Sturgis Partners LLC, and will be watching to see how companies deploy their strong balance sheets.
- Lisa Palmer, president & CEO of Regency Centers Corp . (Nasdaq: REG), said she believes remote working will be one of the permanent changes from COVID. The pandemic has also reinforced the importance of last-mile facilities, she added.
- Tech and life science companies are competing for the same office space, forcing life science companies to make faster leasing decisions, according to John Kilroy, chairman and CEO of Kilroy Realty Corp. (NYSE: KRC). He added that while office space isn’t going away, “it’s going to be used differently” in future.
- Equity Residential (NYSE: EQR) President and CEO Mark Parrell noted that even before the pandemic, the affluent renters it targets were geographically dispersing. That trend is expected to accelerate, he said.
- Sherry Rexroad, managing director, global real asset securities at BlackRock, said a focus on sustainability “makes good business sense in the long run.”