As we see Wall Street finally starting to bottom out, as many of our senior analysts had warned us on, we can?t help but be reminded that this all started with the housing crunch. How are real estate investment trusts (REITs) faring? We spoke with
Greg Sukenik, senior REIT analyst for Zacks Equity Research, to find out.
Considering the uphill climb most REITS have undertaken this year, would you say the real estate cycle is basically where you thought it would be? Is it different for different types of REITs?
The REIT sell-off began in early 2007. After several years of good returns, REITs were trading at historically high and probably unsustainable valuations. We did expect commercial property REITs to be negatively affected by the problems in the credit markets which were brought on by the meltdown in residential real estate and a declining overall economy.
So to answer your question, yes we did expect equity REITs to come down in 2008. Now we feel REITs as a group are fairly valued, and are neutral on the sector. We think share price gains will be minimal at best through the end of the year. There are just too many negative factors weighing on commercial real estate.
Does the Fannie Mae and Freddie Mac bailouts by the U.S. government do anything to stem the tide of investments flowing out of real estate, at least within the companies you cover?
The Fannie Mae (FNM) and Freddie Mac (FRE) bailouts add uncertainty to the REIT picture. As a major source of financing for commercial real estate, especially apartments, it is still unclear how this will change when both companies are controlled by the government. Mortgage REITs that invest in Fannie and Freddie securities should fare better, and got a boost after the bailout announcement, as the government will now be a buyer of these bonds, which will support bond prices.
We have heard a lot of negative talk about retail lately. How will retail-focused REITs fare in the next two quarters or so?
We are cautious about retail strip and mall REITs. There are two many shopping centers and malls in this country, especially in overheated markets where developers continue to build strip centers. Many of the largest retail chains are closing underperforming stores, curtailing expansion plans, and some have gone bankrupt ? Linen N? Things, for example.
We think retail landlords will have a difficult time leasing newly built space and rents, which have been going up at a rapid pace over the past few years will moderate or even go down.
