Pru Confident on Real Estate Returns

May 7, 2001 ( - The real estate sector is poised to outperform other markets this year, according to Prudential Real Estate Investors (PREI).

The group’s latest report shows the sector to be well positioned to withstand the current weakening demand in contrast to a decade ago, when an overbuilt market struggled with rising vacancies and falling rents.

Real Estate Investment Trusts (REITs) fell 0.5% in the first quarter, outperforming the S&P 500, which fell 12.1%. REITS also beat the NASDAQ, which plunged 25.5%, and the Dow Jones, which slid 8.4%.

Through the first quarter, REITs raised $4.82 billion in new capital, mostly in the form of unsecured debt, the highest quarterly total since the second quarter of 1999 saw $5.17 billion raised.

Forecasts Still Upbeat

Though the economic slowdown is affecting the sector, PREI forecasts are still optimistic.

In particular:

  • debt issuance is expected to remain stable, with about $72 billion in commercial mortgage-backed securities to be issued in the US. That’s in comparison to $61 billion a year ago
  • the apartment sector should grow 300,000 units annually
  • total new construction should reach $25 billion this year.

Prudential remains optimistic that REITs will continue to outperform private real estate and will access the capital markets through new debt and equity offerings, despite increased selectivity by these markets.

This in turn may lead to increased M&A activity during the year, resulting in slower funds from operations (FFO) growth to about 8% this year, down from 9% last year.

Property Markets

PREI analysts anticipate that employment growth, the key driver of demand, will fall below 2% this year and may yield some loosening in the office market, particularly in suburban areas and tech-heavy markets as San Francisco.

Analysts also anticipate that:

  • though near-term rental rate growth could decline, longer-term office investments will provide some protection. The outlook remains strong overall, with returns between 8.25% and 8.5% in 2001
  • the apartment market will remain a favorite among investors, thanks to aging Baby Boomer demand
  • the warehouse sector could weaken a bit as smaller companies that rely on warehouse space fail
  • investors will shy away from hotels and retail space, as consumer confidence wanes
  • interest in retail will remain low, fueled by scaled-back expansion plans by such retailers as JC Penney and Nordstrom, and the failures of some online retailers.

PREI’s report can be viewed at PREI’s Web site at: