REIT stocks have outperformed the S&P and almost all
other financial indices over every measuring period for the
last ten years. (18) Vornado's stock
has also done well. The following table presents the data.
In real estate, the private market has driven cap
rates(19) down to the 5s and 6s,
leading the public market. Cap rates are sticky – they may
bounce a bit, but I believe they will stay lower for longer
than people seem to think. We won't see 8% cap rates again
for better properties for years. This swing to lower cap
rates is a secular phenomenon that will survive a bounce
in interest rates.
It's obvious that for a long time now we have been in a
worldwide period of easy money. The universal consensus
is that America is recovering, inflation is in the wind and rates are going up. |
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I guess I sort of agree, but I still feel that easy money is
a secular phenomenon. In any event, in the current environment,
we will run the business defensively with respect to rates.
As I write this letter, REIT stocks are bouncing. The logic
seems to be that stronger jobs reports point to a stronger
economy, which points to higher interest rates, which
points to declining real estate values. I don't get it.
History clearly shows that a dose of inflation and growth
has been good to great for rents and the value of existing
real estate. And while I don't wish for it, higher rates, if
they were to happen, will take out new-builds as competition
for our in-place real estate. My guess is that REIT
stocks just got a little ahead of themselves.
Mike and I think that our great assets, financial might,
brand recognition, and deal flow are important to our
future success. While we have become a large company,
we believe we still can achieve a good rate of growth.
We continue to think that simplicity is a virtue and on-the-fairway
investments (mainstream) are our franchise.
Perhaps we should have been even more aggressive over
the past couple of years – we will see. In the current
environment, while it is difficult to buy assets, we have and
we will continue to find our opportunities. And, our best
business today seems to be working our assets while we
watch the market mark them up. |
