‘High Price’
“It doesn’t strike me that there’s an issue in commercial real estate,” Moore said. “The office building in San Francisco trading at a very high price has nothing to do with oil prices.”
U.S. property values are breaking records after a five-year recovery from the financial crisis. Prices for buildings in big cities such as New York and San Francisco are 30 percent higher than they were at the previous peak in 2007, according to Moody’s Investors Service and Real Capital Analytics Inc.
As real estate values climb, so does the likelihood of REIT buyouts as long as share prices continue to underperform property prices. More than half of publicly traded REITs have at least a 10 percent chance of being bought out, according to Green Street. The portion of REITs with those odds reached a high of 80 percent in 2006.
REITs that own hotels look especially cheap relative to the value of the properties they own, making them an attractive target, according to Hartwich of Green Street. Sunstone Hotel Investors Inc. and DiamondRock Hospitality Co., both trading with a 25 percent discount to their asset values, have takeout odds of 30 percent, Green Street data show.
Hit Harder
“Hotels are just more economically sensitive,” Hartwich said. “When you have some jitters in the market, that tends to hit the hotel sector harder.”
Representatives for Sunstone and DiamondRock didn’t return telephone calls seeking comment.
While a large discount in share prices relative to property prices will attract buyers, it may also mean real estate values are poised to fall, said Andy McCullough, a Green Street analyst. In the run-up to the property-market crash in 2008, there was a rush of REIT takeovers. The public market is often a good indicator of what will happen in the private market, McCullough said.
“It’s right more often than it’s wrong,” he said. “When you see discounts this large, it should make real estate investors a little nervous.”