Participants on a panel at REITWorld 2016: NAREIT’s Annual Convention for All Things REIT, agreed that volatility is likely to persist in the REIT industry as markets digest the impact of the recent general election.
Timothy Naughton, 2017 NAREIT Chair and chairman and CEO of AvalonBay Communities, Inc. (NYSE: AVB), moderated the Nov. 15 roundtable.
Nora Creedon, managing director and portfolio manager at Goldman Sachs, pointed out that many thought that the economic cycle was slowing at the start of 2016. Following the presidential election, however, the consensus has switched to one of potentially higher growth and inflation, she said.
Creedon added that with REIT implied cap rates in the range 5.5 to 6 percent, the market could absorb a higher 10-year Treasury rate. “There will be volatility while we sort that out,” she said.
Steve Sakwa, head of real estate research at Evercore ISI, agreed that the market could tolerate a higher 10-year Treasury rate. At the same time, Sakwa said the election result could prompt some investors to re-allocate capital as they consider switching to industries set to benefit from increased infrastructure spending. Sakwa also said most of the major REIT property segments are now in a slow-down phase.
“Most sectors are on the backside of the cycle,” he said.
Regarding the emergence of new REITs, Seth Weintrob, managing director and global head of real estate at Morgan Stanley, observed that following a couple of active years in terms of REIT spin-offs, conversions and new market entrants, the picture may change going forward. Weintrob said he anticipates a “political crackdown” on REIT spin-off rules. Sakwa agreed that new market segments are unlikely to emerge at this time.
Addressing Shareholder Activism
Naughton turned the discussion toward factors fueling recent activity in shareholder activism.
Sakwa pointed out that the commercial real estate industry features many family-owned businesses that are “still run like private enterprises in a public wrapping.” This lack of “fresh blood” has been a key factor in fueling activism, according to Sakwa.
Speaking from a management perspective, Bill Stein, CEO of Digital Realty (NYSE: DLR), stressed the importance of “executing strategy and trying to ignore the (activist) noise.” He highlighted the need for companies to manage shareholder expectations and operate with corporate governance that is truly transparent.