This year’s flood of new realty company stock offerings could boost the amount of money in publicly traded real estate investment trusts to a record $30 billion by the end of 1993.
But as investors stampede the real estate investment trust market looking for higher returns, industry analysts and even REIT sponsors are starting to wonder about how long it will be until the bubble bursts.
With billions of investment dollars pouring into their businesses, REIT managers admit they are having a harder time finding properties that can produce the returns that securities buyers expect.
“Because of the debut of so many REITs, everybody is running around. Today you have to work hard to find a (property with) better than a 10 percent return,” said Ric Campo, chairman of Camden Property Trust of Houston.
Unprecedented boom
Worries about the potential for rising interest rates and a possible new round of commercial building also nag an industry enjoying an unprecedented boom.
“Anybody that has ever been around REITs for a while has to be overwhelmed,” said John McCann, president of Richmond, Va.-based United Dominion Realty Trust and chairman of the REIT association.
Indeed, REITs this year have produced total returns (the combination of dividends and yields) of about 26 percent. That’s compared with a return of about 7.5 percent from the Standard & Poor’s 500 index.
Unlike REITs that went bust in the 1970s by providing mortgages to developers, most of today’s public property companies invest in unleveraged, existing commercial properties such as shopping centers and apartments.
So, why are so many REIT analysts trading nervous looks? They worry that in their rush to acquire properties, many REIT managers aren’t being selective, which will drive down industry returns, leading to an investor exodus. Economists also question how long current conditions of low interest rates and a lack of alternative investments will favor REITs.
“We have a window of opportunity,” said Martin Debrovner, president of Houston-based Weingarten Realty Investors. “No one knows how long it will last, but eventually it will peter out.”
To date there’s no sign of a slowdown. More than 20 new REITs in registration will raise almost $7 billion.
Industry optimists predict that REITs could total more than $100 million during the next few years.
“We are of the opinion that 1994 will be as big a year, or bigger, for IPOs (initial public offerings) than 1993,” said Keith Pauley, senior vice president with Alex. Brown Kleinwort Benson. “We’d need to see a very significant (stock market) correction before we see a slowdown in the amount of new offerings that want to come to the market.”
Worries about quality
Still, Pauley worries that all of those new offerings aren’t the quality of the recent batch of REITs.
“Investment demand has provided a market that makes it easier for investment bankers to sell lower quality deals,” he said. “I think we are going to see a more mixed bag.”
Chicago real estate investor Sam Zell warned REIT industry members to “keep it clean.”
“The frenzy of REIT creation is beginning to push the (Wall) Street to the outside edges of the envelope,” Zell said. “If we continue to think we can put one over on (the investment bankers and investors)-and we do-this will be a very short-lived phenomenon.”
With the proper discipline, Zell predicts, real estate investment trusts will grow even larger in size.
“The industry, which is close to $20 billion today, could easily be $150 billion three years from now,” he said. “This is a permanent activity-not a flash in the pan-if we don’t screw it up, if we don’t get greedy.”
The billions of dollars that have come into the REIT market during the past 2 1/2 years have primarily come from mutual funds and money managers who are shopping for higher-yield investments. So far, institutional buyers such as pension funds account for a small but growing proportion of REIT ownership.
“They offer diversification, one of the primary focuses of mutual funds,” said Suzanne Willoughby, securities analyst with the Franklin Group mutual fund. “Our commitment to equity REITs is solid.”
But many other REIT investors aren’t so committed, analysts say.
“Mutual funds are not necessarily a dedicated, long-term player in the industry,” said Fredrick Carr, principal with the Penobscot Group, an independent REIT industry consulting firm. “They could be derailed by a number of companies producing surprises (in dividends and returns).”
