Financial conditions remain favorable for the REIT industry, despite near-term economic challenges that include rising inflation, labor shortages, and supply chain bottlenecks, according to a State of the Capital Markets panel speaking at Nareit’s REITworld: 2021 Annual Conference.
Nareit President and CEO Steve Wechsler moderated the session, which included: Chad Gorsuch, head of real estate investment banking at Stifel; Lisa Kaufman, global head of securities at LaSalle Investment Management; Christopher Lucas, lead REIT analyst at Capital One Securities; and Scott Schaevitz, managing director at Barclays.
Kaufman noted that over time, long-term corporate interest rates have had the tightest relationship to real estate values. Right now, “those rates are extremely supportive of risk assets, especially real estate, because it’s such a capital-intensive business,” she said. “We have very favorable financial conditions that, to us, suggest continued upward pressure on real estate values.”
Looking at the capital markets, Gorsuch noted that it is “still a remarkably robust” environment for issuing unsecured notes. Volumes, while not at the record levels of 2020, are ahead of 2017 and 2018 levels, and “November is off to a pretty robust start,” he said.
Schaevitz, meanwhile, said REITs have had a “great year,” although part of that is simply regaining ground that was lost last year. “We’re not wildly overvalued right now. There are some good fundamentals in a lot of spaces,” he observed.
Schaevitz also highlighted the “huge discrepancy” between the high- and low-multiple REIT sectors, which he attributed to the entrance of generalist investors. Wechsler pointed out that Nareit has worked hard in recent years to attract generalist investors into the REIT market.
For her part, Kaufman said implied yields on REIT stocks are higher compared to their long-term history, generally speaking, but that there are good reasons for this. “We are still expecting the sector to generate total returns that are well above the long term high-single-digit total return that the sector has generated,” she said. The two assumptions underpinning that view are that the recovery is sustained and that financial conditions remain supportive.
Meanwhile, panelists also commented on particular segments of the REIT industry. Lucas said Capital One favors segments that are suburban-driven. “We like open-air centers a lot. We think that environment is incredibly appealing” based on the recapitalization of retailers and a “liquid consumer and much better wage growth than we’ve seen for years,” he added.
Kaufman said LaSalle sees external growth potential in the gaming sector, while billboard real estate is a “nice recovery play” with no structural headwinds.