What are the hallmarks of a great speaker? After eight years of attending breakout sessions and keynote addresses on the state of commercial real estate, I've concluded that the best in the business share three traits: they are informative, persuasive and, above all, entertaining. Not since I first heard billionaire real estate tycoon Sam Zell in the late 1990s compare REITs to oligopolies have I encountered a speaker as dynamic as Susan Hudson-Wilson, CFA, founder and CEO of Property & Portfolio Research.
Her speech, delivered to several hundred attendees of UCLA Extension's Real Estate Finance and Investment Conference in Los Angeles on Oct. 2, summarized the state of the property and capital markets today. “Remember, I can say whatever I think,” she joked to the audience. “That's the cool part about my job.”
So, what's her take on the investment outlook for real estate? “On a relative return basis, real estate has been winning,” says Hudson-Wilson. “I'm talking about public real estate, private real estate and real estate debt.” A comparison of real estate returns to other options such as the Dow Jones World Stock Index and the Wilshire 5000 reveals real estate's extremely low volatility. The NAREIT Index, for example, shows returns of about 10% over a 10-year period, easily besting the Wilshire by a few percentage points. “If you are a responsible fiduciary, you have to look at real estate's track record and take it seriously.”
Still, the property markets are exhibiting some clear signs of stress at this point in the real estate cycle. Here, Hudson-Wilson offers some strong commentary:
Sell apartments — With the exception of a few markets such as Los Angeles where there are renters by necessity, the multifamily sector is experiencing a three-pronged problem: declining net operating income, rising vacancies and dwindling demand. “If you have multifamily product, sell it into this market,” Hudson-Wilson urges. “I'll tell you though that the word is getting out. You've got maybe 15 more minutes and that door is going to slam shut. You'll be amazed at how fast capital is going to walk away.”
Short the mall REITs — Because today's retail sales are dominated by value-oriented discounters such as Target, Hudson-Wilson believes that malls with traditional department stores are in for rocky times. “Any mall that you walk into that has a Penney's, a Sears … figure out what REIT owns it and short [the REIT stock] because those tenants are going down.” Hudson-Wilson argues that while mall owners can indeed reposition their properties, that transformation process “creates a nasty cash-flow problem.”
Office lenders beware — Between 1982 and 1992, average annual office construction completions totaled 180 million sq. ft. Today, that figure has fallen to about 75 million sq. ft. One model suggests that between 2006 and 2020 that figure will drop to 38 million sq. ft. “The lenders are going to have to be disciplined in the office market,” says Hudson-Wilson. “We are simply going to require less [construction].”