RECENT NORTHMARQ TRANSACTIONS
SAN CARLOS, CA | 202 UNITS
AFLAC & AT&T BUILDING
COLUMBIA, SC | 140,000 SF
MAPLE VALLEY, WA | 126 UNITS
COMMERCIAL REAL ESTATE
DEBT & EQUITY | INVESTMENT SALES | LOAN SERVICING
Where REITs May Outperform This Year
Even with political uncertainty in Europe, the potential for US
monetary policy missteps and threats of an escalation in the trade
war, PGIM’s Rick Romano anticipates 2019 will be a favorable year
for the US REIT market.
According to Romano, industrial, manufactured housing and
cold storage sectors are poised to outperform expectations in 2019.
Each of these sectors should see REITs leading cash flow growth
and they will even have the opportunity for upward earnings revisions during the year.
Industrial: The industrial sector continues to benefit from
e-commerce-driven demand particularly in the last mile of distribution. Additionally, institutional capital continues to be focused on
industrial which should prevent cap rates from expanding. “We
continue to monitor supply but with the exception of a few markets
we continue to see a landlord’s market for pricing power,” says Rick
Romano, head of Global Real Estate Securities at PGIM Real Estate.
Manufactured Housing: As more institutions recognize it as an
investable property type, manufactured housing continues to benefit from institutional capital flow. Due to the affordability and the
age-restricted focus of the property, demand for manufactured
housing remains defensive. It is also difficult to add supply which
remains very constrained. Additionally, operating margins remain
higher than traditional multifamily, and there is an opportunity for
the public REITs to continue to consolidate the space, says Romano.
Cold Storage: This segment is very attractively priced in the pub-
lic markets relative to private market transactions and more institu-
tional capital is being drawn into the sector, which may result in a
cap rate compression. Cold storage benefits from a needs-based
defensive demand (food storage). The potential for further grocer
e-commerce penetration, which still has to come into its full poten-
tial, will further drive demand. Additionally, the property type’s
ownership is very fragmented leading to consolidation opportuni-
ties to drive external growth.
“The storage market is currently at the peak of a supply cycle.
Starting in 2016, the sector saw a dramatic increase in new supply
averaging roughly 5% to 8% of existing stock annually over the past
three years,” says Romano.
Senior Housing: Though it’s also suffered from above-average
supply additions over the last several years, senior housing’s con-
struction pipeline is clearly moderating—now representing 6% of
existing stock—down from 7% in 2016-2017. That said, 6% is still a
high number and most healthcare REITs are expecting negative SS
NOI growth in 2019. “In addition to a competitive supply, senior
housing operators face constant pressure from rising labor costs
which represent roughly 60% of total expenses,” says Romano.
On the positive side, the demographic demand wave from the
aging population in the United States is undeniable and should
really kick into gear in 2020 and beyond. So while 2019 is likely to
remain a tough year for the sector in the public markets, the set-up
looks highly favorable over the long-term.
According to Romano, REITs should continue posting stable
operating fundamentals with 2% to 3% same-store NOI growth
resulting in cash flows of 5% to 7% and dividend growth over the
next 12 months, he explains. That said, performance will vary
among property types, with industrial likely to see the best NOI
growth at more than 4%, while retail and storage are likely to be
on the lower side, at 1% to 2%.—Tanya Sterling ◆