The data suggest that nearly 21% of metropolitan area private sector GDP is derived from construction and real estate (residential and commercial). If we add in public sector GDP -- which also happened to be approximately 21% of total GDP in 3Q09 based on government data (link here) -- and assume that the private sector GDP referenced in the table includes personal consumption, private investment, and net exports for each metro area, then the contribution from construction and real estate declines to around 16-17% of total GDP.
We did purchase several REITs amidst the Market mayhem last winter/spring and mentioned our First Industrial preferred position last week. While most REITs have recovered smartly from lows and fundamentals remain poor, we are looking to selectively add well-positioned REITs to our portfolio that trade at a discount to our estimate of fair value. Such a move is somewhat akin to Warren Buffett's "bet" on Burlington Northern (BNI, $98.53) in the sense that we're also betting that the U.S. economy will slowly recover.
Real estate isn't exactly the same as an impossible-to-duplicate footprint of national railroad infrastructure, yet well-placed real estate assets can assume monopoly like characteristics on a local basis, which we like. As a result, we're willing to wade through ongoing sector challenges that make valuation difficult (i.e. capitalization rates remain in flux on an uncertain fundamental outlook). Over time, we expect certain implied discounts to net asset value to shrink as equity values increase. Meanwhile, cash dividends provide compensation for patient investors.
Disclosure: Long FR-PrJ.
© 2009 Jeffrey Walkenhorst
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