REIT Industry Veteran Talks About What to Expect from the Sector

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Working for REITs has been a significant part of Aaron Halfacre’s career.

From July 2014 to March 2016, Halfacre served as president and chief investment officer of Charlotte, N.C.-based student housing REIT Campus Crest Communities Inc., which Chicago-based Harrison Street Real Estate Capital LLC took private in 2016 in a $1.9 billion deal.

Right before that, Halfacre led capital markets strategy and investor relations at Phoenix-based Cole Real Estate Investments Inc. At Cole, he helped execute its more than $11 billion merger with another publicly-traded net lease REIT, American Realty Capital Properties Inc. (which now goes by the name VEREIT).

Now, as the newly minted president of Los Angeles-based real estate investing platform RealtyMogul, he will tap into his experience at the two REITs, as well as at New York City-based investment management firm BlackRock Inc., to help guide RealtyMogul’s investment strategies. RealtyMogul recently launched its second non-traded REIT, which focuses on multifamily properties.

In a Q&A with NREI, Halfacre shares his 2018 outlook for commercial real estate in general, as well as for public REITs, student housing REITs, net lease REITs and 2017’s “baby out with the bath water” sector.

The Q&A has been edited for length, style and clarity.

NREI: Generally speaking, what’s your outlook for the commercial real estate market in the U.S. this year? Why?

Aaron Halfacre: From a top-down perspective, I believe fundamentals remain favorable. We’ve seen continued same-store NOI growth, relatively healthy supply absorption and solid occupancy levels. Moderate expected GDP growth and the continued low interest rate environment provide additional economic support. That said, from a bottom-up perspective, I see pockets of unsustainable cap rate compression in certain MSAs and asset sectors, as well as veins of questionable exuberance, given all the capital seeking higher returns. The age-old truth in real estate remains today: you have to buy right and manage tight.

NREI: More specifically, what’s your take on how publicly-traded REITs will perform this year? Will 2018 be better overall than 2017?

Aaron Halfacre: In 2017, publicly-traded REIT performance was anemic relative to the S&P 500. I think that can be largely attributed to a few factors: big demand for large-cap “infotech” names driving the broader market, a meaningful sell-off in retail REITs and general market hesitation on REITs in front of the tax bill and Fed decisions. On a relative basis, publicly-traded REITs are well-positioned in 2018, not only from the fundamentals picture, but from a value perspective.

NREI: What about non-traded REITs?

Aaron Halfacre: I think 2018 could be as strong, or stronger, than what we saw in 2017. Personally, I am excited about the industry changes in the non-traded REIT space. It is a good thing to see Blackstone and Starwood entering the space while some of the traditional fee-hungry shops have bowed out—a good advocacy trend for the individual retail investor. Institutional-grade real estate choices without the… fee structures of yesteryear, combined with greater valuation transparency and an investment that is not correlated to the broader equity market — that’s a positive story for all of us who aren’t part of the 1 percent.

NREI: You previously worked for a student housing REIT. What’s your sense of how the student housing sector will perform this year and beyond? Where are the opportunities and where are the landmines?

Aaron Halfacre: The student housing sector is really an interesting one, and I don’t think most REIT investors appreciate the nuance of the space. Many liken it to a multifamily proxy, and we have certainly seen cap rates approach, and even come in tighter than, apartment cap rates. I believe this is due both to the sheer amount of capital coming into the space and also the impact that the publicly-traded student housing REITs have on market perception. However, the spectrum of quality is huge and not all investments should be treated equal.

Randy Churchey [EdR] and Bill Bayless [American Campus Communities Inc.] both run great REITs. Being public entities, they have a lot of Wall Street scrutiny and, over time, have really shifted their asset mix to core and super-core. They also have been successful in entering very strategic on-campus joint ventures with housing-constrained universities. The implied cap rates on some of their deals appear rich, but you’re really seeing this combination of great assets and operators and limited public supply, with the vast majority of student housing capitalization being in private hands.

That said, those cap rates shouldn’t always be extrapolated to other student housing investments. Proximity to campus, the strength of your leasing team, the ability to manage tenant turn and the relative bed supply in each market are what can make or break you in student housing. An inexperienced management team with an older property three miles from campus could be the death knell for the uninformed investor.

NREI: You also once worked for a net lease REIT. How do you think net lease REITs will fare in the near and long term? Which segments of the net lease REIT sector do you think are poised for the most growth?

Aaron Halfacre: I’ve always liked net lease REITs, public or private. In an abstract way, a good net lease REIT is akin to a laddered bond portfolio with an equity kicker. There are many great shops out [there] that are deft at underwriting credit and finding good purchases. Yes, it’s a competitive space, but it’s one of the few real estate asset classes that is materially scalable. There is no real technical reason you couldn’t have a $50 billion or $100 billion net lease REIT—a massive fixed-income investment proxy that has real credit diversification and durable income.

On a long-term basis, I am bullish. Just this past June, we saw Berkshire Hathaway make a very large investment in Store Capital—that’s a vote of confidence.

NREI: Which REIT sectors do you think might surprise investors this year in terms of their strength or weakness?

Aaron Halfacre: I think we saw a bit of the “baby out with the bath water” in the retail real estate sector last year. Yes, I agree that Amazon and other online retailing disruptors are forever changing the real estate landscape. Yes, there are numerous class-C malls and plain vanilla big-box strip centers in which I wouldn’t want to invest a single dollar.

However, we saw investors dumping all retail real estate, and I think it is oversold in some areas. I was at a real estate conference recently and no one was talking about retail. That is a contrarian signal to me. I think the potential exists that select retail REITs could surprise to the upside this year.

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