NEW YORK-Even as the residential housing and mortgage markets remain fragile, with housing starts and sales faltering-many money managers believe commercial real estate is headed for a worldwide boom.
The reason for the positive outlook for commercial real estate and real estate investment trusts (REITs):
*Capital improvement stimulus plans in the developed countries
* Further development of the infrastructure of emerging markets
* Strong municipal issuance
* High REIT dividends
* Acquisitions within the commercial real estate space
"The global commercial real estate recovery has begun, and global REITS" will lead the charge, said W. Stevens Carroll, managing director of CBRE Investors Global Real Estate Securities [ CBG ](GRES). "Listed REITs assets and balance sheets are optimally positioned today."
Just take a look at all of the construction taking place in New York and the greater metropolitan area, Carroll said. "New York City is a leading indicator. The [commercial real estate] recovery is just beginning to take shape."
Carroll's comments were given at the American Beacon Advisors "Oversight 360°" presentation here on June 16. Carroll is one of the portfolio managers and co-chief investment officer on the American Beacon Global Real Estate Fund [ CBLIX ]. GRES, a subsidiary of CB Richard Ellis Group, Inc., one of the world's largest publicly held commercial real estate services firms, currently manages $2.1 billion of global REITs on behalf of institutional investors, and was formed in 2004, just ahead of the mortgage and credit crisis.
The American Beacon Global Real Estate Fund returned 37.7% in 2009, but declined -45.91% in 2008, along with the rest of the real estate market. Year-to-date through July 21, the fund is negative -5.54%.
How can Carroll and others be so confident that commercial real estate is headed for a recovery?
The CBRE co-CIO said global REITs are still below their peak and likely to rebound over the next five to seven years for a number of reasons. "They can access capital globally in a meaningful way," Carroll said, adding, "The outlook for internal growth is also strong, as commercial landlords poach tenants from weaker landlords into REITs properties."
While investment executives at Neuberger Berman agree that there are opportunities in real estate and other alternative asset classes, they tend to seek individual, bottoms-up opportunities and remain wary of real estate and the mortgage market in general.
"This is the most psychological market we have ever seen," said Anthony D. Tutrone, managing director and global head of Neuberger Berman's NB Alternatives Group. He made his remarks at a media briefing at the firm's midtown Manhattan headquarters on June 8.
Due to the "events of Europe, volatility, fixed income, corporate bonds, the mortgage market and currencies-our views have shifted the past couple of months, but not dramatically," added Bradley C. Tank, Neuberger Berman managing director and chief investment officer of fixed income.
REITs Beat All Indexes For a Decade
Real estate investment trusts (REITs) were the best-performing equity category of the past decade, according to the National Association of Real Estate Investment Trusts.
An investor who put $10,000 into the FTSE NAREIT Equity REIT Index at the beginning of the decade finished it with $27,454 in their pocket, as the index rose an average of 10.63% a year. By comparison, investors who chose the S&P 500 Index, which fell an average of 95 basis points a year, finished by just $9,090; the Nasdaq Composite Index, down an average of 5.67% a year, $5,577; and the Russell 2000, up 3.51% a year, $14,127.
"The average annual total returns from U.S. REITs over the past decade were more than 10 times the total return of the S&P 500," noted NAREIT EVP of Research and Investor Outreach Michael Grupe.
Grupe added that the FTSE NAREIT Equity REIT Index also outperformed other equity benchmarks over the past 15, 20, 30 and 53 years.
"Despite the turmoil of recent years, long-term investors who maintained their investments in REITs and publicly traded real estate were rewarded for their discipline," he said.
Last year, the index rose 27.99%.
"U.S. REITs have demonstrated the ability to access capital through a variety of sources," noted NAREIT President and CEO Steven A. Wechsler. "The public equity markets have been extremely supportive of secondary equity offerings. Additionally, re-equitized REITs were able to access the unsecured debt markets on significantly more favorable terms in the second half of the year. Private REITs also have been very successful in raising new capital in the past year."
- By Lee Barney