Apartment and industrial sectors to lead REIT performance in 1Q: Barclays
As earnings season presses on, Barclays Capital is expecting pronounced bifurcation in the real estate investment trust market subsectors. The conclusion is reached with respect to overall performance. In a report released Tuesday, Barclays said it expects apartment and industrial REIT performance to improve during the first quarter. Effective rental rates are up about 5%, according to Barclays, which should drive positive leasing trends. "With a few notable exceptions (namely Apartment Investment and Management Co.(AIV)), most REITs have begun to let high occupancy levels burn off in order to push rents higher," Barclays said. The firm believes it will take substantial growth in the multifamily sector to achieve current valuations set at a 14.2% premium; however, Barclays recommends looking for pockets of opportunity in this sector. As far as the industrial sector is concerned, Barclays expects market rents to bottom in mid-2011. In fact, the company said, rents are up in some markets. Office and retail REITs, on the other hand, will continue to lag, Barclays said. Leasing volumes in office REITs under the research firm's supervision have recently shown strength and pricing power is expected to bounce back in gateway cities such as San Francisco or New York, which is giving REITs in those cities an edge up. "We also like companies with strong balance sheets and platforms, with the ability to pursue external growth opportunities (including those with some lease-up risk)," Barclays' report said. Analysts said they feel "especially confident" in office REIT Boston Properties Inc. (BXP) activity in the coming months. By and large, the transaction activity sector remains scarce for regional mall assets, according to Barclays. The firm also mentioned that shopping center net absorption will be hindered as national retailer demand is offset by key bankruptcies, including Borders and Blockbuster. Barclays expects a 13.5% growth rate for apartment REITs in the first quarter and a 15.1% growth rate for fiscal 2011 over 2010. The industrial sector is expected to grow 4.2% for the fiscal year. Office REITs will experience 2.1% growth in the first quarter of 2011 and 3% growth on an annual basis. Shopping center growth will fall 3.3% during the first quarter, according to Barclays, while regional mall REITs will grow 18.9%. For fiscal 2011, these sectors are anticipated to grow 12.7% and 32.6%, respectively, Barclays said. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR. Disclosure: The author holds no relevant investments.