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Chicago Area REITs’ 2015 Outlook

Chicago

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.

Chicago Area REITs’ 2015 Outlook

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:

Chicago Area REITs’ 2015 Outlook

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.

Chicago Area REITs’ 2015 Outlook

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.