"Abundant and cheap debt capital is clearly a driver," LaSalle's Ms. Kaufman said. While interest rates have ticked up a bit, real corporate rates — which compare long-term corporate bonds to long-term inflation expectations — are still well below the pre-pandemic period, Ms. Kaufman said. "That indicates to us that there are still downward pressure on capitalization rates" meaning that real estate values should rise, she said.
At the same time, many managers expect robust operating growth over the next few years. LaSalle expects 5% average annual internal operating growth (net operating income) of all of the REITs it tracks from 2022 through 2025, Ms. Kaufman said. By contrast, the average long-term REIT growth is around 2.5% or 3%, she said. The combination of growing net operating income, real estate values poised to rise and relatively cheap debt means "you want to buy now," Ms. Kaufman said.
LaSalle factors likely REIT mergers and acquisitions and their potential to boost returns as a secondary consideration in its portfolio construction, she said.
It's not as easy as choosing REITs in a hot or cool sector, Ms. Kaufman said. Companies have to be willing to sell, either because their stock prices are below the value of the REIT's real estate, or are smaller in scale.
However, not every REIT would fit LaSalle's portfolio, she said. LaSalle executives are looking for REITs in which the management team is dedicated to shareholder value and whose interests are aligned with shareholders by such things as compensation packages. For underperforming REITs, management has to have a clearly articulated turnaround strategy and be open to pursuing alternatives like a merger with another REIT or a sale if their turnaround strategy is unsuccessful, Ms. Kaufman said.
However, with REIT returns up more than 40% in 2021, alternative investment managers are not finding many bargains, Nareit's Mr. Worth said. "The dog that didn't bark" is the subdued pace of distressed REITs going private since March 2020 despite expectations that the pandemic could lead to distress, Mr. Worth said.