Despite his aversion for prognosticating, the 53-year-old Lee, who began his career with T. Rowe Price as a research analyst in 1993 and has been the fund’s lead manager since its inception in 1997, sees both positive and negative developments on the horizon for portfolio companies in 2016. One concern he has is the disconnect between the strong official numbers for economic growth, which bode well for real estate, and the less-buoyant public perception of the economy.

“Lower unemployment, higher auto sales and other measures suggest that the economy is growing at a decent pace,” he says. “But a lot of people aren’t feeling that growth is as strong as it should be. And the impact of macroeconomic headwinds, such as inflation and slow growth in China, are very difficult to predict.” 

Perhaps the biggest question mark is where interest rates are headed. Even the threat of rising rates, which increase borrowing costs and make dividend income look less attractive than that from fixed-income investments, can put fear into the hearts of investors. That was a major reason the group’s stock returns fell far short of the overall market in 2013, the year the Fed began dropping hints about tapering quantitative easing. 

On a positive note, Lee says, the supply-demand balance for real estate appears sound. “The amount of commercial real estate being built relative to the existing base is fairly tame,” he says. “Oversupply is often the culprit when it comes to ending the party. But we don’t see that as a threat at this point.” 

As a group, he also notes, REITs have stronger balance sheets and more reasonable debt levels than they did in 2004, when the last round of rate increases kicked in. Many have locked in low fixed rates on loans for several years, which would help offset any rise in rates for short-term lines of credit. And dividend payout ratios are low by historic standards, which means companies are in a good position to produce enough dividend income to keep investors happy without having to strain too much. 

Recent changes in the Foreign Investment in Real Property Tax Act, which make it easier for foreign investors to take positions in publicly traded REITs, are another positive development. But Lee is less enthusiastic about the reforms than some REIT specialists, calling the changes “a marginal tailwind, rather than something that will open up a large flood of investment capital.” 

To help weather a variety of market conditions, Lee favors REITs that focus their properties in locations that are more immune to overbuilding and new supply, including populated cities on the East and West coasts. At the sector level, he looks for developments with steady demand—for example, a shopping center that’s anchored by a supermarket with a dry cleaner and a fast, casual dining option. “It’s hard for those kinds of needs-based shopping areas to be swallowed up by the Internet,” he says.