The REIT sector is still facing challenges in terms of raising capital, even though U.S. REITs led the world in terms of secondary offerings and initial public offerings, according to a report by Ernst & Young. "Coming out of a period of recessionary pressure, the big challenge for REITs is how to grow again," the report said.
With low Treasury yields and a positive spread between the cost of buying real estate and financing it, commercial real estate's performance will hold, says Alexander D. Goldfarb, managing director and senior REIT analyst at Sandler O'Neill + Partners. Even though the recovery is faltering, fundamentals are adequate to support REIT growth. People are "renting apartments. They're shopping at the mall. They're leasing office space. They are leasing some warehouse space, and they are going back to college."
If the recovery slows measurably in the U.S. and financial issues in Europe worsen, REITs could feel the impact, says Michael Hudgins, global REIT strategist at JPMorgan Asset Management. "This would put a damper on the potential for capital appreciation for REITs until the cash flow for those properties goes positive again," he says. Estimating the risk in Europe is tricky, Hudgins says, as JPMorgan's research shows that total returns there are often linked to local nominal GDP.
At ICSC's Marketing Conference in Vienna, speaker Jesper Bo Jensen, of Future Research, reminded attendees that the future retailing market will be focused on discount, not luxury. "Nothing is the same, and it won't be again," he said. "The new world is high quality, low price, unique or very special."
Industry experts at ICSC's Deal Making convention in Chicago were cautious but optimistic. "It's a great time to buy land and by the time it is developed and built out, hopefully the economy will be good again," said one attendee.