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At Schwab Impact, Solid REIT Investments Seen in Apartment Buildings, Malls

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Marty Cohen, co-CEO of REIT money manager Cohen & Steers, says that although residential real estate continues to disappoint, commercial real estate (and certain sectors in particular) is performing well, and his firm is taking full advantage.

“People might not like the pace of our economic growth,” Cohen said in an interview with AdvisorOne on Tuesday from the Schwab Impact 2011 conference in San Francisco. “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, Cohen said, 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,” he explained. “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, multi-family tenant buildings are doing well. Cohen said “the bloom is off the rose” with home ownership and the greatest imbalance he sees in any sector currently between supply and demand is in multi-family tenant buildings.

“If a person goes bankrupt or experiences a foreclosure, they can’t get a mortgage,” he said. “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.”

“Regional malls are also experiencing solid returns,” Cohen said. “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.”

Lastly, he said 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, he noted, hotels are more cyclical and therefore more volatile.

Two areas he said aren’t performing well are suburban and central business district office spaces, which has 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,” he said. “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.”

Officially, he concedes the inflation rate is low. Unofficially, however, he said goods and services are costing more, but not reflected in many inflation indicators. If the economy continues to recover over the next six, 12 or 18 months, Cohen says demand for tangible assets, and therefore real estate, will increase.

“Real estate is a proven hedge against inflation. The average REIT experience 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.”

Click here to read AdvisorOne’s complete coverage of Schwab Impact 2011.


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