The capital markets provide predictive signals for the trajectory of real estate asset values. Today, the signals from the bond and REIT markets suggest that real estate asset values are likely to decline over the next year. How is that expectation shaping public and private apartment firms’ strategies? Executives weigh in during the 2016 NMHC Spring Board of Directors Meeting.
Mark Parrell, executive vice president and CFO of Equity Residential, a public REIT, argued that cap rates appear to be pretty stable, suggesting that asset values might also be more resistant to downward pressure than anticipated. Moreover, in many cases, he said he sees asset value increasing because NOI is increasing.
“So, going forward, there’s no great reason for these values to greatly disconnect,” Parrell said. “We think we’re going to prove through the cycle that we’re creating more durable value.”
While acknowledging that he probably holds a more negative view of the world, Joe Fisher, REIT portfolio manager for Deutsche Asset & Wealth Management, said he was expecting multifamily asset values to decline, but there would be differences in magnitude and effect for different asset classes.
Parrell agreed to an extent, saying that his company’s strategy over the past few years has been to focus on top-tier assets, where values are likely less volatile. This belief is what led company executives to shed more than a tenth of its portfolio, selling off the balance of its assets in Denver and South Florida when pricing was advantageous despite some early signs of volatility.
“When the cycle does change and apartments are less desirable [as an investment], we think that the apartments in those six 24/7 cities will remain more desirable,” Parrell said, underscoring the concept of durable value.
But Sue Ansel, president and CEO of privately-held Gables Residential, said that while the public markets were helpful to look at, especially for benchmarking purposes, they weren’t the main driver behind her business decisions.
“When it comes to volatility in the markets, it’s hard to draw too many conclusions that impact our strategy on a daily basis,” she said. “We probably don’t spend as much time looking at public markets as some would say that we should for strategy.”
That said, Ansel also offered some insight into how the public markets participated in some key ownership decisions at some critical points for the company. Going back to 2005, when Gables was privatized, Ansel said, “At that point in time, we saw that, over a longer period, Main Street was valuing real estate much higher than the public markets were.”
However, the question of public or private resurfaced roughly a decade later as the ownership structure was nearing the end of its hold term and looking for an exit. Ansel said the executive team evaluated a variety of options from going public again to selling asset by asset. However, to take the company public would require selling assets at a discount, so that led management in alternative direction.
Looking at other uncertainties in the market, the executives considered the potential effect that a Fannie Mae and Freddie Mac exit from the capital markets would have on publics and privates.
While most agreed that REITs would have an advantage, Ansel had a slightly different perspective. “Public companies have a cost of capital advantage, especially around development,” she explained. “But it would be much more challenging for anyone to sell assets because the capital wouldn’t be there. You’d see a big choke point. And it would have a negative effect on everyone, not just the private companies. You can’t dispose and you can’t refinance in that scenario and that would be bad for all of us.”
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