REITs Kick Off 2012 with Continued Bifurcation

By Jonathan Morris, Managing Director, Jones Lang LaSalle’s Capital Markets Group

The REIT sector has seen some positive moves in the past year, including outperforming other major stock indices, but it's imperative to see whether REIT funding makes sense for a given project.

By Jonathan Morris,
Managing Director, Jones Lang LaSalle’s Capital Markets Group

The Stifel Nicolaus REIT Research team’s annual look ahead at the Center Club in Baltimore in early January provided a wealth of knowledge on the past performance of REITs and predictions for the year ahead. “Mind the gap” was the headline. This simple phrase describes the significant gap between the REIT stock leaders and those in the second, third and fourth tiers, ranked in terms of year-to-date performance. Here is a summary of their findings:

  • The REIT index was up 9 percent for 2011 (14 percent in the fourth quarter alone) beating all other major stock indices;
  • Storage, multi-family, healthcare and retail led 2011;
  • Industrial and hotel lagged the year (though both came back in the fourth quarter);
  • Of the 16 public REITs in the S&P 500, 10 had positive returns;
  • Public Storage, Simon Property Group, Health Care REIT Inc., AvalonBay Communities Inc. and Boston Properties were star performers;
  • REITs had liquidity advantage over the private sector, because of the $30 billion raised in 2011, about 60 percent was unsecured debt and the balance was equity;
  • Mergers and acquisitions are picking up, and IPOs remain slow.

The stark contrast between public REITs was once again evidenced in 2011. Stifel, as well as other research groups, separate REITs into four tiers. On the office side, Boston Properties was up 18 percent, and Douglas Emmitt was up 13 percent. Both companies trade with an implied portfolio cap rate of 5.4 percent, the lowest metric of all the office REITs. Just behind those in the second tier were several household names with an implied cap rate of 6.6 percent. The “Gateway City” office REITs continue to outperform the REITs that hold suburban office properties.

A few interesting notes:

  • Significant Japanese individual investment flows into public REIT stocks continued through 2011;
  • In January 2009, the identified Japanese inflow to the REIT sector was $10 billion, but at year-end 2011, it was estimated to be $35-$45 billion;
  • Clearly, the Japanese came into the space at a terrific time and have enjoyed the recovery.

Washington, D.C. Metropolitan Area

The federal government attracted much attention in 2011. With an inability to compromise, both houses of government made resolutions at the 11th hour. And the supercommittee came up empty-handed as well. The push to shrink government doesn’t bode well for developers seeking to land the GSAs or a federal agency as a new tenant. While the Senate seems to be fluidly approving new leases, the House of Representatives has held up dozens along with approval for existing lease extensions.

The furor over trying to contain federal spending will, no doubt, affect the real estate industry in Washington, D.C. With a pared-down defense budget, the major defense contractors will likely see fewer contracts and, therefore, need less space.


Once again, the structure of the public REIT continues to trump many private real estate companies. Access to capital – debt and equity – to get through these uncertain times is paramount. While the top-tier public REITs continue apace, the lower tier companies struggle to find the handle. Several have advanced the notion of structuring joint-ventures with either institutional investors who have a lower cost of capital, and will help fund a project that makes sense; or inversely, the public REIT may be the funding source to a private developer that owns a great site or existing building that is positioned well for retrofit and re-positioning.