By Byron Carlock, PwC US Real Estate Leader –
My travels have continued in 2017 and I recently had the opportunity to attend NAREIT’s REITWise conference in La Quinta, CA.
The conference covered a variety of beneficial and relevant topics for the REIT industry. Sessions included panels to discuss the state of the real estate and capital markets, impact that the new political landscape is having on the markets, strategic outlook for 2017, and the implementation of new accounting standards such as leases and revenue recognition, among many other relevant topics for law, accounting, and finance professionals across the real estate industry.
Over the course of the few days, I was able to have many engaging conversations with our clients and colleagues regarding current industry developments, the outlook for the REIT industry, and what is on the horizon for the overall real estate market. It was an exciting opportunity to hear from other industry professionals about what they are currently seeing in the market, emerging trends and expectations of what is ahead for the real estate industry as a whole.
During the conference, our US real estate practice hosted a party at the polo fields for industry peers to network and discuss current political, economic and market events that impact various aspects within the REIT industry. With almost 200 industry professionals attending, this was the event of the conference!
Now that I’ve had some time to reflect, here are some of my key takeaways:
· The real estate industry is looking generally healthy. Net operating income and funds from operations continue a positive upward trajectory albeit with slower growth as we reach the maturity of the recovery cycle, which has experienced peak recovery in virtually every asset class for the last several years.
· All indications point to an elongation of the cycle. Supply and demand statistics are still pointing toward demand exceeding supply, especially in the housing and industrial sectors which appear to continue to be at the top of investor preferences. The new administration in Washington has a continued opportunity to extend this cycle through policies that are friendly to the real estate industry.
· Signs of UNDER-valuation of REITs. There are actually some signs of undervaluation of REITs due to overreactions to expected interest rate increases and certainly over a positive spread compared to ten-year treasury rates. This is expected to continue through the current cycle.
· Uncertain policy changes around tax and regulatory reform. This uncertainty seems to have stalled some transaction volume but the expectation is that those changes will have positive effects on the real estate industry, namely expected expansion of credit for real estate development and securitization as well as positive impacts from expected tax reform.
· Accounting and tax issues continue to be at the forefront. The revenue recognition and leases standards, which are two significant accounting pronouncements which will be implemented in the near term, seemed to dominate the accounting issues discussed. Given the pervasive impact to the real estate industry as a whole, this appeared to generate quite a bit of interest during these sessions. Tax reform and further relaxation on FIRPTA seemed to dominate tax discussions.
· My biggest takeaway? Industry performance continues with strong funds from operations (FFO) growth in the REIT industry. Uncertainty with respect to tax reform and regulatory reform and modest interest rate increases has tempered some enthusiasm, but is actually elongating this recovery cycle.
These signs continue to point to an extended real estate recovery cycle across asset types and in each major market, with investor preferences still leaning towards housing and industrial which is consistent with industry trends over recent periods. As mentioned, this recovery cycle may be impacted by the policy changes on the horizon, but are expected to have a positive impact on the real estate industry especially once we receive further clarity on the outcome.
The sustained success of the real estate industry is exciting, and I am enthusiastic about 2017 and beyond as we are likely to see these trends continue through this current cycle. I’m looking forward to what is ahead of us.