REITs still attractive to investors, but opportunities in the Midwest limited Dan Rafter February 19, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email As client portfolio manager for Des Moines, Iowa-based Principal Global Investors, Todd Kellenberger understands what good investments REITs can be. And in 2020? He expects a good year for REITs once again. Midwest Real Estate News spoke with Kellenberger about the state of commercial real estate, why REITs remain such a favored investment type and what the future holds for real estate investors. Here is some of what he had to say. When you look at the rest of 2020, do you expect REITs to remain a strong investment vehicle? Todd Kellenberger: The setup remains pretty good for real estate and REITs. Supply and demand is fairly balanced. Rents are rising in certain markets and sectors. The macro environment is favorable, too. Interest rates are likely to remain lower. Economic growth is stabilizing. That’s a positive. All of these factors support demand for real estate. We continue to see strong transaction activity. This all means good things for REITs. What makes REITs so attractive to investors today? Kellenberger: While equity markets were strong last year, they might not be as strong this year. We continue, then, to see investors looking to REITs as a way to diversify and gain more of that defense exposure. REITs are also providing above-average yields. Investors are going to be looking for more of that this year. When you look at the real estate market, which sectors seem especially strong today? Kellenberger: We see opportunities in some of the more niche areas of the market. In many of these niche areas, we see above-average demand. For instance, single-family rental REITs are strong right now. There is a structural shift that we are seeing in the country now toward lower rates of homeownership. The affordability is tilting in favor of renting instead of buying homes in some markets. We see strong demand, too, for life sciences REITs. The pharmacy and biotech fields are strong. We are seeing tenants leasing space rapidly in that area of the office market. We like that part of the office market. Data center REITs are another strong area. Mobile data usage continues to increase. Cloud storage usage is increasing, too. Well-located data center assets are in high demand. How strong is the demand for REITs that focus on industrial assets? The industrial sector is certainly a busy one today across the Midwest. Kellenberger: Industrial is not necessarily niche, but it is certainly strong. There is a lot demand for industrial assets today, with much of it fueled by the continued growth of ecommerce. Industrial is another area about which we are positive. It comes down to demand. Look at the healthcare segment. We favor that segment because demand is so strong for it. The seniors housing market is the same way. What about multifamily? That’s another CRE asset class that is performing well across the Midwest. Kellenberger: Demand is rising for single-family home rentals. It’s also rising for multifamily properties. People are moving toward renting today. Within that multifamily segment, we have a preference for West Coast and Southeast markets. They have stronger local economies. We are also seeing a migration to these areas population-wise. There is excess demand for multifamily properties in those markets. Do you see any Midwest markets that are particularly attractive for investors? Kellenberger: Most Midwest cities are healthy today. But out view is a bit more neutral on the Midwest. Chicago is the anchor of the Midwest, of course. We see good demand there, especially for industrial. But for some of the other property types we see a more elevated supply. There are fewer barriers to supply in these Midwest cities relative to cities on the coast. We see that longer-term rent forecasts are a bit lower for the Midwest than they are in some other areas. We also see better population trends in certain markets outside the Midwest, in terms of migration. In the Midwest, we are seeing people moving away. From a real estate perspective, location matters. In certain submarkets within these Midwest cities there are good opportunities. But from a broader REIT perspective, we don’t have a lot of choices anymore in terms of the ability to invest in the Midwest. A lot of the investment activity has migrated toward coastal cities, with the exception of the industrial market, mainly in cities like Chicago and Indianapolis.