We had a simple question for Marty Cohen: “What the heck is going on in the REIT space?” OK, we’ll concede it’s not so simple. But with a real estate market that can generously be described as dismal, why does the REIT sector continue to outperform? Is it a castle made of sand, we wondered?
Cohen, co-chairman and co-CEO of REIT money manager Cohen & Steers, patiently explained the differences in performance between residential versus commercial real estate recently and let us in on where he and his firm see the good deals.
How can REITs perform so well when underlying real estate remains such a huge concern?
People might not like the pace of our economic growth, but the fact remains that the economy is expanding. We are adding jobs, and there is an increasing demand for office space with no new supply being built. Uncertainty in the market means there is low demand for new buildings; vacancy rates fall and excess space instead gets utilized. That translates to a landlords’ market, rather than a tenants’ market, which in turn translates to good returns for property investment. The real estate market is not monolithic; it is regional and varies by type. In the regional space, the middle of the country isn’t doing as well because that is traditionally a manufacturing base. The coasts, however, are doing well. In the second category, property type, multifamily tenant buildings are doing well.
Is that because owning in the residential real estate market is not what is once was?
The bloom is certainly off the rose with home ownership. The greatest imbalance I see in any sector currently between supply and demand is in multifamily tenant buildings. If a person goes bankrupt or experiences a foreclosure, they can’t get a mortgage. We had 2.5 million people added to this category last year. Renting is the only proposition they have. Couple that with recent college graduates who see renting rather than owning as a better proposition in the current economy, and the reasons the sector is doing so well become clear.
What are you excited about in the commercial space?
Regional malls are experiencing solid returns. No new malls are being built; people like them, but don’t want them in their backyards. The forecast for December sales are strong, so that is another area we like. Hotels are doing surprisingly well, and the rate of revenue per room is increasing in the high single digits to low double digits each week. But hotels are more cyclical and therefore more volatile. Two areas which aren’t performing well are suburban and central business district office spaces, which have the downturn in financial services working against them. What’s happened in commercial real estate has not gone unnoticed; I believe it’s the only asset class with net inflows this year. The reason is that real estate can’t be outsourced; we can’t have a trade war over office space. I always say there is no asset more real than real estate.
So, like gold and other precious metals, people want tangible assets in a volatile market?
Officially, the inflation rate is low. Unofficially, however, goods and services are costing more, but are not reflected in many inflation indicators. So yes; if the economy continues to recover over the next six, 12 or 18 months, demand for tangible assets, and therefore real estate, will increase. Real estate is a proven hedge against inflation. The average REIT experiences 8% growth and a 4% dividend yield. Currently, you’d be hard-pressed to find that type of return. Utilities, I suppose, have a decent yield, but nowhere near the growth potential.