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Green Street exec: Public REITs now better opportunity than private real estate

Public real estate investment trusts offer better upside potential today than private market opportunities, and private players should be weighing asset sales in the near term while valuations are still high and prospective buyers are capital rich, according to Green Street Advisors' Jim Sullivan.

Sullivan, president of advisory and consulting at the prominent real estate research firm, said Jan. 16 that the "massive" discounts at which public REITs are trading may be a leading indicator for downside in the private market.

"The public market is saying, 'Whatever you private guys think of valuation, we disagree. We think those values are too high.' And the public market is predicting that, say, a year from now, values in commercial real estate, certainly in the major property types, [are] going to be lower," Sullivan said on a panel at IMN's annual Winter Forum on Real Estate Opportunity and Private Fund Investing.

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Sullivan deemed public REITs' operating fundamentals to be "pretty good" overall, even though excess supply has entered the conversation again. Low levels of new product coming to market had boosted public REITs' business as the economy crawled out of the 2008 financial crisis.

"We don't have too much development in most markets and most property types, but we do have enough new development in a lot of places ... to make your pro forma over the next five years that much more challenging to reach, whether it's occupancy; whether it's your ability to drive rent; whether it's, in senior housing, your ability to attract labor at the cost you underwrote," he said.

On balance, REITs' pace of growth is decelerating, but operations are still sound in most segments, with lower-end retail the notable exception, Sullivan added. REITs today are a far more compelling buying opportunity than any direct investment in real estate, even in gateway markets such as New York City, he said.

"If I was an investor and thinking about buying an office building ... why would I pay 100 cents on the dollar for an office building in New York when I could buy [SL Green Realty Corp.] and its entire portfolio for 80 cents on the dollar? Why would I buy one building as opposed to a portfolio at a giant discount attached to a very talented management team?"

Sullivan made some waves at the start of the conference with an extended monologue about the lack of communication between the public and private sides of real estate. Overall, leaders in the private real estate market should be paying more attention than they do to the public market for sell signals and signs showing where the market may be heading, he said.

"The two worlds own the same assets, but they speak different languages, and they don’t talk to each other very often," Sullivan said. "And the knowledge that could get transferred from the private market to the public market and, importantly, from the public market to the private market, still hasn't happened in anywhere near the volume that you would expect."