Clearly these economic conditions are not robust and this slow-growth environment is good for equity REIT investors. As Jordan Sadler with KeyBanc explains:
This gradual recovery in demand, slow recovery in demand, is good for real estate because you're soaking up space, and it's not yet robust enough to translate into new supply. Real estate landlords and owners are not yet at a point, because the economy's prospects are so muted, where they're looking to speculate in any significant way and looking to go out and build excess capacity. So the risks of oversupply are very low, by and large, throughout the space.
The Fed's earlier stimulus actions, along with prevailing economic conditions and unfettered access to capital markets among REITs, have also driven down required returns for real estate and, in turn, pushed down cap rates -- which equates to higher property valuations.
KeyBank's Sadler explains that the firm is "an advocate of the 'risk on' trade." He adds that his firm "likes the shopping centers . . . and the industrial REITs all year long." And he "thinks we're in an environment where the economy is gradually recovering, and you don't need to pay a premium for quality, and lower leverage, and things that are just going to be safer."
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