Remember when commercial real estate was "the next shoe to drop"? Listening to REIT executives talk about current market conditions at NAREIT's annual convention in New York, it became apparent that the days when everyone was waiting for Armageddon are thankfully behind us.
For one thing, it seems that the pace of leasing has picked up considerably in the past six months. Michael Glimcher, chairman and CEO of Glimcher Realty Trust, talked about foreign retailers starting to enter new U.S. markets. Executives from PREIT noted that they are actually postponing lease renewal conversations until after the holiday season, instead of locking renewals in right now. The 2010 holiday shopping season is likely to be a strong one, they said, and next year the leasing environment is going to be more favorable for landlords.
In fact, according to comments by Milton Cooper, executive chairman of Kimco Realty Corp., and David Simon, chairman and CEO of Simon Property Group, the most recent real estate downturn has been a piece of cake compared to the one they lived through in the early 1990s. Back then, "real estate" remained a dirty word for several years and it was virtually impossible to convince investors to put money into commercial properties. The modern-day crisis has abated within a much shorter time span. Today, both debt and equity are readily available for anyone with high quality assets.
That's not to say that the REITs haven't learned some hard lessons during the more recent downturn--most having to do with maintaining low leverage ratios and investing in only the highest quality assets. Cooper, for example, noted that if he had to do it over again, Kimco would not deviate from its focus on shopping centers. (He mentioned that the company invested in some assets that were not pure retail because they offered higher yields, but even though those assets had performed well, he now views the strategy as too risky). Simon cautioned investors against risky assets as well, noting that it's wiser to concentrate on current cash flow than on future potential.
Commenting on the need for REITs to stay away from complex financial engineering, Simon also made an aside about General Growth Properties, which emerged from Chapter 11 bankruptcy protection earlier this month. In his view, it was fortunate that the judge in the GGP case allowed the properties that were held in special purpose entities to be included in the company's bankruptcy filing. Otherwise, the case would not be a reorganization, but "a liquidation," Simon noted.