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CRE's late-cycle bill of health 'shockingly good,' Green Street chair says

Real estate investors and executives should spend less time attempting to plot the inevitable inflection in the market and more time focused on their own business and balance sheet, according to Mike Kirby, Green Street Advisors' chairman and director of research.

A "nasty recession" will hit at some point, but supply is largely under control, and real estate companies are in "pretty good shape," having already executed a measure of preparedness planning, Kirby said March 20 at the NYU Schack Institute of Real Estate's 2018 REIT Symposium.

"Supply, we've seen it ramp up in probably five different property sectors, and every time it's ramped up, it's stopped when it should have," Kirby said in an afternoon Q&A. "Those are the first five times in my career that I've ever seen that happen. It's unheard of, and the discipline we're seeing on the capital side is fantastic."

The whole sector now sits in a relative stasis that Kirby called comfortably "boring." He said the core segments of the private real estate market are "pretty fairly priced" at present, at a ballpark low 5% cap rate "very normal" pricing based on Green Street's three decades of data while public real estate investment trusts are cheap.

"At least if we are going in for something bad, we're not overpriced to begin with," Kirby said. "The state of affairs in the real estate world is shockingly good this late in the cycle."

Retail realism

Kirby later waded in to retail, the real estate segment with the most pronounced weakness. He posited that the negative sentiment is probably overdone in places, but the weakest properties are "just toxic." There will be a "lot of carnage" among B and C malls, he said.

"Every mall rated B or lower you better be careful," Kirby said. "It's probably a value trap. ... Really, you're just counting how long you're going to be able to clip a coupon. And unless you're getting something ... that [is] a double-digit to start with, I think the coupon is going to run out on you before you capture your full return on investment with some of these malls."

Higher-quality A malls will fare well, but they are still going to need to spend enormous sums to redevelop to keep up with evolving consumer tastes. Redevelopment requirements are the driving force behind go-private deals and prospective deals in retail, including Brookfield Property Partners LP's play for GGP Inc., Kirby said.

There are roughly 1,300 malls in the country, and most of them will fail, Kirby said.

"Maybe there are 75 or a 100 malls that are going to absorb this," Kirby said of the ongoing change and retail restructuring. "And they're going to be the centers of the universe."