In the latest edition of the Nareit REIT Report podcast, Jim Sullivan, managing director and REIT analyst at BTIG, discussed the outlook for New York real estate following Amazon’s decision to abandon its plans to locate a second headquarters in Long Island City.
Sullivan said that while the loss of a potential 25,000 jobs will obviously result in less demand, a recent decision by Alexandria Real Estate Equities, Inc. (NYSE: ARE) to purchase property in Long Island City speaks to the area’s growing importance as a home for the life sciences industry. He expects Alexandria to expand its presence there in the coming years. Overall, the Amazon decision is “not a death knell for Long Island City, but clearly a short-term setback.”
Over the last couple of years, New York has become a center of tech job growth—including a significant commitment from Google, as well as from Amazon in Manhattan, according to Sullivan. “Firms up and down the spectrum of tech and social media are expanding aggressively in New York,” with New York-based tech start-ups raising more than $20 billion from venture capital in 2018, he noted.
In the latest edition of the Nareit REIT Report podcast, Tim Bodner, U.S. real estate deals leader at PwC, discussed a range of topics, including the outlook for REIT mergers and acquisitions (M&A); the appeal of non-gateway markets; and the performance of non-traditional REIT asset classes.
Last year saw several major REIT M&A deals, with an average value per transaction of $6.4 billion. Two deals exceeded $10 billion, Bodner noted.
“We do believe that conditions are in place for more of the same in 2019,” fueled in part by the “tremendous” amount of private capital available, Bodner said.
Michael Torres, CEO of Adelante Capital Management, and Jeung Hyun, portfolio manager, joined the latest edition of the Nareit REIT Report podcast.
Torres and Hyun discussed a number of topics, including: REIT fundamentals; discounts to net asset value (NAV); merger and acquisition (M&A) activity; the role of active portfolio management; and the potential for increased Asian investment in real estate.
Torres noted that the REIT industry is entering 2019 with attractive dividend yields and record-low leverage. On the other hand, private market participants have a lower cost of capital and the ability to outbid their public market counterparts.
Hyun said he expects some property types will trade at discounts to NAV for the foreseeable future. As for M&A activity, public to public deals are not as likely because “investors aren’t making enough of a distinction between companies and management teams to whom they want to grant the cost of capital advantage.”
In the latest edition of Nareit’s REIT Report podcast, Nareit Senior Vice President for Government Relations Robert Dibblee and Nareit Vice President for Government Relations John Jones discuss the outlook for the 116th Congress.
With the House of Representatives now under Democratic control, and a divided Congress for the first time in nearly a decade—in addition to a looming presidential election cycle—prospects for legislative accomplishments are modest.
“There will mostly be gridlock where policy is concerned, which we’re seeing reflected in the recent government shutdown,” Dibblee said. Must-do items, such as appropriations bills and debt limit legislation, could be the only two exceptions to the gridlock for the next two years, he said. “However, the current standoff could have long-term impacts on every aspect of the legislative agenda that we can’t anticipate right now.”
Jones noted that “most issues will end up becoming polarized and it will be very difficult to accomplish anything of great importance during a presidential election cycle, especially beginning late 2019.”
Tom Bohjalian, Cohen & Steers’ head of U.S. real estate and a senior portfolio manager for the firm’s real estate securities portfolios, was a guest on the latest edition of Nareit’s REIT Report podcast.
Bohjalian sees REIT fundamentals in 2019 looking a lot like 2018, “with supply and demand largely in balance and with landlords still having some relative pricing power.” Cash flow and dividend growth on a per share basis should remain in a mid-single digit range for both 2019 and 2020. Asset values should also remain relatively stable.
Bohjalian shared the view that REITs remain significantly underrepresented in defined contribution (DC) pension plans. Increased investor education on the positive attributes of REITs, including strong returns, diversification, and liquidity, will result in investors moving away from a traditional equity and fixed income allocation to one that adds more alternatives, including REITs, he said.
“It will be a continued process of education and that will take time,” Bohjalian noted.
Sherry Rexroad, chief investment officer of the Americas and global real estate securities platform at BlackRock, Inc., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Rexroad said sustainability is playing an increasingly central role in investment decisions at BlackRock.
“We really believe that sustainability-related issues, ranging from board composition and human capital to climate change, can, and often do, have real quantifiable financial impacts,” Rexroad said. BlackRock’s approach, she said, is to include environmental, social, and governance (ESG) information into the investment decision-making process as part of the risk and return analysis.
Gemma Burgess, managing director at executive search firm Ferguson Partners Ltd., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Burgess commented on California’s move to require public companies to have at least one female on their boards.
“We see it as a great step forward. Moreover, the importance here is placed on the investor community and boards to do the right thing… I think we’re seeing that in huge numbers at the moment across the country,” Burgess said.
Lori Marks, a senior credit officer at Moody's Investors Service, Inc., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Marks said overall credit conditions for REITs are “stable, as real estate fundamentals remain solid and REITs maintain healthy balance sheets.” Growth is slowing for many property types, she said, with REITs expected to generate low single digit net operating income (NOI) growth next year.
Moody’s expects REITs to maintain discipline as they seek investment opportunities, Marks said. “REITs are still able to issue unsecured debt at attractive, albeit higher, interest rates, and are also enjoying access to private capital as institutional demand for real estate remains strong,” she noted.
Diane Morefield, executive vice president and CFO of Cyrus One Inc. , was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
CyrusOne received an investment grade rating from Standard & Poor’s in September. Although the company welcomed the news, Morefield said the ratings agencies have been slow to understand the data center model. She noted that prior to the CyrusOne upgrade there was only one other data center REIT with an investment grade rating.
“Our profile, and that of the other data centers, is very consistent with the broader REIT industry,” Morefield said. She noted that more than 70 percent of CyrusOne’s customers are investment grade rated.
“We’ve suffered from being classified as … a non-traditional REIT category, which has caused the rating agencies to review our asset class, in our view, more harshly than other REITs,” Morefield said. Looking ahead, “we’re very optimistic that we will achieve full investment grade rating in the near term as the other rating agencies now catch on to our more traditional traits.”
Morefield also commented on CyrusOne’s focus on customer satisfaction. About 80 percent of leasing activity each quarter comes from existing customers.
Meanwhile, Morefield said CyrusOne’s biggest opportunity for 2019 lies in international expansion. “We are well on the way to having a really strong footprint and portfolio throughout Europe,” she noted, while the company is also investing in data center platforms in China and Latin America.
Lisa Kaufman, global CEO and Americas portfolio manager for LaSalle Investment Management Securities, was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Kaufman said operating fundamentals are in equilibrium across most real estate sectors, with internal growth likely to roughly match inflation for the next couple of years.
Among the outliers, however, are cell towers, where the runway for growth is “longer and better than what the market perceives,” she said.