January 8, 2015

Chicago Area REITs' 2015 Outlook

REITs had a banner year in 2014, outperforming other parts of the stock market with returns even hitting 40% for residential REITs. We talked to Trepp senior director of research Susan Persin about what this year might have in store for our hometown REITs.

One of the best pieces of news, says Susan, is REITs' upcoming reclassification into their own Global Industry Classification Standard (GICS) sector, a change MSCI and S&P will implement in 2016. What that means: equity REITs will now be separate from the financial services category and could receive a major boost in allocation and capital inflow from institutional investors (sooner than you think, since it takes time to shift sector weights). It legitimizes REITs' new mainstream appeal and only spells growth for the sector (expect spinoffs and increased specialization to continue), Susan says. Now let's zoom in on trends affecting Windy City REITs:

CohnReznick (Field) MCHI

Multifamily Mavens: Sam Zell's Equity Residential and Equity Lifestyle Properties

Apartments and mobile homes continue to be REITs' strongest performing asset class, Susan says. Even with people's concerns about overbuilding rentals, the market's overall outlook is strong and will only benefit from rising interest rates in 2015 (which make homeownership more expensive). EQR tends toward the urban young professional renter, Susan says, a demographic with increasingly positive potential as job growth improves and Millennials feel confident enough to ditch their roommate situations.

Retailers and Hoteliers: General Growth Properties, Retail Properties of America, Inland Real Estate, Strategic Hotels & Resorts

Retail (our profile of RPAI CEO Steve Grimes here) and hotel REITs (BEE CFO Diane Morefield here) should be feeling really good about these falling gas prices, Susan tells us. People who aren't spending their whole paycheck on gas have much more disposable income to spend on shopping and travel. The downside will be for those heavily invested in energy markets like Houston and Denver. Those cities are already seeing layoffs, she says, especially from companies that make equipment for suppliers to the industry.

Hot Hot Healthcare: Ventas and Aviv REIT

The Affordable Care Act has treated healthcare REITs well for a simple reason: More people having insurance (especially in today's aging population) means a greater demand for services. Susan has noticed a trend among healthcare REITs of broadening their scope to become less reliant on federal reimbursements. That means a push into areas like assisted living or age-restricted housing in addition to nursing homes (which propelled Aviv toward a killer buyout), as well as international investments, like the Ventas acquisition of independent living properties in Canada. (Here's our profile of CEO Debra Cafaro, pictured.)

Quiet Industrial and Office: First Industrial Realty Trust and Equity Commonwealth

Industrial and office may have been product types with comparatively lower returns in 2014 (though you can't complain about 20%), but with supply and demand unchanged you can expect an uptick in 2015, Susan says. Office faces its challenges as companies use space more efficiently, and it will be interesting to see young Equity Commonwealth's strategy with Sam Zell back in the office game. Industrial may not be glamorous, but online companies' move to same-day delivery continues to generate demand for warehouses closer to urban centers and that “last mile,” she tells us.

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Liston & Tsantilis (28thFloor3)
Peak (Yellow) CHI
CohnReznick (Field) CHI


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The Death of Malls: Greatly Exaggerated?


If you've been feeling down since the New York Times piece on the death of malls came out this week, we come bearing positive news. Simon Property Group's Woodfield Mall in Schaumburg, one of the largest in America, will undergo a “major renovation” involving its common areas this year, with details to follow at a special invite-only event on Jan. 20, the Daily Herald reports. Woodfield's other exciting update: the upcoming opening of Level 257, a Pac-Man themed restaurant/entertainment mecca.


The reason Woodfield's doing well while others are ending up on DeadMalls.com? It's a “have” (a trophy asset targeting high-end consumers) not a “have-not,” the NYT writes. The have-nots have met more unfortunate fates. More than two dozen enclosed malls have shuttered since 2010 and 60 more are on the precipice, according to Green Street Advisors' data. In addition to the bottom half of the 99%'s dire socioeconomic straights bringing down demand, the market's become just too saturated from the ghosts of retail booms past.


CMK Bets Big on the
South Loop

A venture led by residential developer Colin Kihnke paid around $26M for one of the largest development sites downtown (north of Roosevelt on the east side of the Chicago River) after paying almost $8M for a parcel next door, Crain's Chicago Business reports.

It's just adding to the South Loop's snowball as the next residential hot spot, with other projects already landed or on the way from AMLI, JDL and Michigan Avenue Real Estate Group. (Not to mention the Roosevelt Collection, pictured.) CMK's new property is zoned for more than 1,000 residential units, so it will be interesting to see what the condo guru has planned.

Roosevelt Collection

Congratulations, Jim Planey

We'd like to congratulate Lee & Associates of Illinois founding principal Jim Planey, who was just awarded SIOR's 2014 Richard G Levy President's award for his achievements both in and out of the business throughout his more than 40-year career. Snapped: Penny Levy, Jim and Elise Couston, SIOR's 2014 Chicago chapter president. Some fun things we've gleaned about Jim over the years:

  • He likes visiting the Seven Natural Wonders of the World with his son Donald.
  • His first job, at age 11, was selling Christmas cards door-to-door in September.
  • His first car, at age 16, was a 1954 Ford he could almost afford with his pay from Montgomery Ward.

Congrats again, Jim!

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