Realty Check

It doesn’t make a whole lot of sense, if you’re the type that likes to invest on solid fundamentals, that is.

Commercial real estate, according to anybody who claims to know, is the other shoe currently dropping in the real estate crash. Rents are down, vacancies are up and property owner/developers can’t get the credit to refinance their commercial loans; malls are losing customers as bankrupt retailers close their doors and offices are echoing with the ghostly voices of employees past.

So why would anyone in their right mind invest in a Real Estate Investment Trust?? Well, for the past two years investors have been dumping REITs at a fast clip. Equity REIT share prices plummeted 75 percent from their peak in February of 2007 to what appears to be a trough in March of this year. But from March 6th to today, REITs are up nearly 52 percent.

“REIT investors, as all public market investors, once again are looking ahead, and what they're seeing is that in recent weeks, REITs, as transparent publicly traded enterprises have been able to crack capital markets,” notes Michael Grupe of NAREIT. “Since the beginning of the year REITs have raised 12.5 billion dollars in both debt and equity, most of that capital coming in the form of equity, over 11b dollars.”

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Just this week Simon property announced an offering of 20 million shares, which would raise over a billion in equity. The stock shot up on the news.

“We're starting to see more lenders get involved,” cites Paul Puryear of Raymond James. “We've seen spreads come in on some of the CMBS products. And we've even seen a company like Simon Properties do the first public debt offering since probably 2008.”

Improvement in the credit markets and at least a falling rate of decline in the economy suggests we could be headed toward a bottom. And for commercial real estate, unlike residential, the trouble was never in the real estate itself, but in the economy and in the credit markets.

“I think there's a lot of confusion between the fundamentals in housing where the industry got hugely overbuilt, and the fundamentals in commercial real estate where this was really not driven at all by overbuilding,” says Puryear. “This down cycle in commercial real estate has been driven by demand destruction, this very weak economy that we're in. We really had very modest levels of new construction.”

Puryear says a lot of REITs are attractive now, and investors are clearly getting ahead of the market, positioning themselves for future growth in the sector. Grupe agrees. “They know that the fundamentals are weak. They already expect that earnings and performance are likely to deteriorate in the months ahead, but they’ve already priced that into the stocks.”

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