A recent study from the Mortgage Bankers Association indicates that “commercial and multifamily real estate finance is at the end of the latest act in a long-running play” and that the next five years will be much different than the past five. Yet the trade group and industry experts expect to see select opportunities, even as interest rates continue to rise.

The fear of rising rates is causing the market to back away from anything bond-like, but real estate is very unlike bonds, says Joel Beam, a managing director and the senior portfolio manager for real estate strategies at Salient, a real asset and alternative investment firm with offices in Houston and San Francisco.

“The phrase that gets bandied about a lot is that real estate is an income-oriented investment,” he says, “but it’s not a fixed-income investment.”

If rates are rising because the economy is growing and if tenants are doing well, he says, then landlords can raise rents, and investments in these properties will prosper over time. Rents and real estate values also tend to rise with inflation. Most bonds, on the other hand, can’t change their coupon and therefore can’t raise payouts when interest rates rise, he explains, so bond prices adjust downward. Adjustable rate fixed-income securities are the exception.

Real estate’s many mergers and acquisitions in recent months “support the thesis that there’s value in the sector,” adds Beam. He expects the M&A theme to continue to play out this year, mostly because “prices are robust on Main Street and they’ve tilted a bit on Wall Street,” he says. Many public REITs are trading at a discount to the net asset value of their properties.

Most people wishing to fulfill their craving for real estate exposure think about buying residential property, says Beam. However, he views commercial property stocks as a good alternative because these REITs tend to be carefully run and investors don’t have to get as wrapped up in leverage and applicable tax deductibility. Under the new tax code, mortgage interest deductions now max out at $750,000 of debt (down from $1 million) on a main home or second home, he notes. Existing loans are grandfathered.

When evaluating REITs, Beam considers their debt service coverage ratios (EBITDA divided by interest plus preferred dividends) and valuation multiples (EBITDA divided by the value of the enterprise; “EBITDA” is earnings before interest, taxes, depreciation and amortization). He also thinks it’s critical to find management teams that can generate late-cycle value for commercial properties.

“The name of the game is to stay full and make sure you maintain your rents or maybe even push your rents,” he says. “It does take some expertise and some shrewdness to be able to make the right proposals, create the right incentives and arrive at the right pricing” when competing for prospective lessees.

As a value-oriented shop, Salient continues to seek opportunities in two real estate sectors that have been beaten up a lot—shopping centers and health care. The internet and the Amazon effect have taken a toll on retail. According to Beam, the best retail assets are in densely populated areas that have comparatively high income and wealth and existing infrastructure that supports a lot of commercial activity.

One shopping center REIT that Salient has exposure to in the Salient Real Estate Fund (FFREX) and the Salient Tactical Real Estate Fund (KSRAX) is Taubman Centers, an owner of high-end malls. Taubman has “an extraordinary collection of assets,” says Beam, and an activist shareholder is pushing the REIT to change its voting share structure to boost its stock price.

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