Tough Economy and Rising Global Investment Take Center Stage at Annual Investment Trust Confab
Highlights of the National Association of Real Estate Investment Trusts (NAREIT) REIT Week included panel discussions on sovereign wealth funds, capital markets and the economy, the growth of REITs globally, along with the customary presentations by dozens of REIT executive teams of every property stripe. (Editor's note: Please see CoStar Advisor's coverage of retailers attending the conference)
What one moderator at The Waldorf=Astoria in New York City described as the "500-pound gorilla in the room," however, is the future of the U.S. economy, which will ultimately determine the depth and breadth of the current commercial real estate downturn.
University of California, Berkeley professor and economist Kenneth Rosen set the tone for the three-day annual conference by estimating the chances of a U.S. recession at an almost-certain 95%. Rosen said there’s a 45% chance of a deep, early-1980s/’90s-type recession in which economic growth would contract by at least 1.8%, with unemployment continuing to rise from the current 5.1% to 7% or more.
Rosen said there’s a slightly better chance that the country will endure a mild recession, which may have already started in January. But the chances of a quick economic turnaround are pretty slim, around 5%, he said.
"We’ve had positive GDP for the last two quarters, but it’s been very weak," Rosen said. "There’s a lot of worry about and we’re on very fragile ground. ... We may be in the eye of the storm, and next leg is about to come down on us. Higher food, energy costs, job losses might lead to deeper recession. It’s going to take just one more bad thing happening."
One more thing like a continued run up in oil prices, which breached a record $139 last week, or a collapse in commodities prices -- combined with continued lackluster consumer spending -- could ricochet the U.S. and global economies into that kind of deep recession late this year or in 2009, Rosen said.
Barring a deep and prolonged recession, Rosen said the commercial real estate market ought to be able to dodge a serious downturn.
"Real estate as an asset class has generally been undervalued in the financial market," he said. "Commercial real estate will have the benefit of not having a big down cycle this time around."
So far this year, REITs seem to be withstanding the storm, at least according to the numbers. NAREIT reported this week that the FTSE NAREIT All REIT Index rose 6.46% through the first five months of 2008, while the FTSE NAREIT Equity REIT Index rose 8.17%. Indicators like the NASDAQ, the Dow Jones Industrials and the S&P 500, in contrast, had all declined through the end of May.
Sovereign Wealth Funds Grow
While the dollar is buying less these days, government-funded pools of investment capital from the Middle East, Asia and Europe are wealthier and more active than ever before, controlling more than $3 trillion in U.S. assets -- a number expected to at least quadruple by 2015 to $12 trillion to $15 trillion. Funds in emerging markets like China and Russia continue to grow into forces to be reckoned with, according to a discussion panel on Day 1 of the conference.
Traditionally, sovereign wealth funds have made passive, fixed-income investments in the U.S., allowing domestic advisors to manage their funds. But recently in today’s credit-starved environment, they’ve stepped in to become lenders of last resort, helping bail out some of America’s largest financial institutions such as Citi and Merrill Lynch, said David Marchick, managing director of The Carlyle Group and panel moderator.
United Arab Emirates, Norway, Saudi Arabia, Kuwait and Singapore round out the top five sovereign wealth fund investors in the U.S. Oil is driving Middle East and Russia investments, while foreign exchange account surpluses are fueling European funds.
China is buying billions in U.S. equities and will become a top sovereign investor within five years, predicted Brad Setser, a fellow of geoeconomics for the Council on Foreign Relations.
Constituting just 1.6% of all deals last year, sovereign funds are a relatively small player compared to pension funds, mutual funds and other established pools of capital. But that’s sure to change, said Jan Randolph, head of sovereign risk analysis for Global Insight Inc.
Sovereign investors are looking for long-term, reliable investment partners and are increasingly looking to manage their own investments rather than contract out to third-party advisors, said Barden Gale, vice chairman of real estate for Starwood Capital Group.
Gale said sovereign wealth funds are becoming increasingly savvy investors, seeking both fiduciary investments in safer havens like pension funds and more "alpha," high-return plays like REITs.
REITs hoping to market to the funds should emphasize liquidity, steady income stream and other traditional REIT benefits, the same approach they would take in marketing to U.S. institutional investors, panelists said.