Is the REIT Market at the Bottom?

Even as financial markets were imploding recently, a spokesman for the real estate investment trust sector was calm and knowledgeable in explaining why REITs are weathering the storm comparatively well.CPN caught up with Michael Grupe, executive vice president for research and investor outreach at the National Association of Real Estate Investment Trusts, Washington, D.C“There’s a large amount of residual uncertainty in the market,” Grupe acknowledged, but added, “we’re reasonably encouraged by this year’s performance” among REITs, despite the volatility in the financial markets.At that point, Grupe said, year-to-date the Dow was down about 16 percent, the S&P 500 was down about 16 percent and the NASDAQ was down about 17 percent, while equity REITs were up about 2 percent. REITs, he concluded, are “reasonably well positioned” versus other investment options, in large part because they are “relatively unleveraged.”Grupe pointed to the favorable response to the public share offering by Kimco Realty Corp., New Hyde Park, N.Y., as evidence of investor confidence in REITs. Kimco’s offering, as reported by CPN, was for 10 million shares at $37.10 a share. The REIT estimated its net proceeds as about $356.5 million, or potentially up to $410 million if the underwriters were to exercise their option to purchase up to 1.5 million shares to cover any over-allotments.Kimco owns and operates the nation’s largest portfolio of neighborhood and community retail centers. At the end of the second quarter, it owned interests in more than 1,900 properties comprising 180 million square feet of leasable space in 45 states, as well as Puerto Rico, Canada, Mexico, Chile, Brazil and Peru. Grupe compared the current cycle with the situation in the late ’80s to the early ’90s and that in 1998–99, when REITs struggled. REITs declined about 23–25 percent earlier this year, similar to the two prior downturns, leading him to conclude that the current cycle is probably in line with those earlier ones.At worst, Grupe suggested, “We may bounce along the bottom for a while” before a true recovery.In general, he noted, because of the more readily available information and greater liquidity, price changes in public markets tend to lead those in private markets. Similarly, long-term trends in REITs tend to lead private markets, as measured by the National Council of Real Estate Investment Fiduciaries, by four or five quarters.REIT prices peaked around February 2007, Grupe said, but the NCREIF index didn’t decline until earlier this year. This cyclic pattern, he said, helps explain why the Kimco offering generated strong interest despite the overall turmoil in the markets and the economy. “The downside risk at this point is minimal, compared to the upside potential.”