By Christopher M. Wright

Name: Bob Lieber Title: Co-Head, Global Real Estate Investment Banking Company: Lehman Brothers Age: 47 Experience: Bob has 20 years of experience in the real estate industry. He has been with Lehman Brothers for 18 years in various positions.

Real Estate Portfolio recently asked Bob Lieber, co-head of Lehman Brothers' Global Real Estate Investment Banking unit, to share his thoughts on the capital markets for publicly traded real estate and the industry as a whole.

Portfolio: Looking at the next six to 12 months, what is your outlook for the economy and the real estate industry in general?
Lieber: The markets are going to be choppy, and I think the fundamentals of the real estate business at the asset level will also be choppy.

There seems to be significantly more capital available for real estate today than at any time in the last several years, but the big question is the economy and whether we will really have a rebound. The indicators are inconsistent. But it just doesn't feel like this recovery is gathering momentum. There is some concern we will have a double-dip recession.

As for the real estate industry, we need some strength in job creation to change the momentum at the asset level and to start filling up office space and apartment buildings. Right now the labor market doesn't look great; there's no momentum for hiring decisions. Companies are holding headcount steady and there's no sector that's growing or looking to add people. We're seeing increasing shadow vacancies in office buildings and declining occupancies in apartment buildings.

Portfolio: Now turning more specifically to the real estate capital markets, what do you anticipate over the next six to 12 months?
Lieber: Here the outlook is still very positive. Investors are being drawn by the relative value of real estate stocks versus other investments. Earnings and growth in real estate are relatively consistent and fairly predictable, unlike other stocks or venture capital. The technology and telecom sectors are still hemorrhaging cash and people. Investors like real estate for its relative safety. I think capital will continue to flow into the real estate business and stocks. REIT share prices have appreciated considerably in the last year, and there may be room to run given the funds inflow I see.

But there are two caveats. The first is that investors must perceive that operating performance at the asset level will begin to improve. The other big risk to share price appreciation in the REIT sector is whether another growth alternative or sector emerges. If the new economy or technology comes back, money will move out of real estate.

Right now, REIT stocks are pretty fully valued given the current earnings levels and direction. At the end of the day, the market likes growth and predictability, and the real estate sector is currently much more favorably viewed than other sectors of the stock market. REIT prices have been up, dividends increased, in the face of a Dow and Nasdaq which have declined significantly over the last three years.

Portfolio: What property sectors look good to you?
Lieber: Industrial and retail look relatively good, followed by office then multifamily.

Portfolio: Where are interest rates headed in the next year and what effect will rates have on the real estate industry?
Lieber: Who knows where rates are headed? There was a lot more conviction that the Fed would raise rates a few months ago. But now it's viewed as much less likely that the Fed will tighten before the end of the year.

A hike in interest rates would increase the number of capital transactions taking place. In the last couple of years, individual asset owners have been reluctant to sell, preferring to raise capital by refinancing at cheap interest rates instead. Selling will look more attractive if rates go up.

Also, if rates go up, you'll see more fixed income securities being issued, as borrowers move to lock in before rates go higher. You'd also see an increase in fixed-rate financing over floating rate instruments.

Portfolio: Do you have your eye on anything outside the U.S.?
Lieber: There's a significant amount of real estate activity in Europe that is attracting both U.S. and international capital. I believe we are witnessing the development of a public market for real estate securities in Europe that corresponds to the rise of REITs in America in the early 1990s. Europe today looks like the U.S. did 10 years ago. At that time, big capital was buying large portfolios from distressed sellers in America as a result of the savings and loan crisis.

Today in Europe with the advent of the Euro, corporations are levered up and under pressure to improve return on equity and assets. They need to sell real estate to pay down debt. There's a lot of surplus real estate in the corporate system. As in America a decade ago, short-term investors (opportunity funds) are acquiring large portfolios of assets and will ultimately dispose of these assets. The public markets are well suited to play the role of long-term holders of real estate. The trend in Europe is actually in the opposite direction at the moment—public real estate companies are going private—but I believe we will see this trend reverse and public real estate securities become an important vehicle for European investors in the near future.

In the current climate, for this evolution to gain momentum, there needs to be greater transparency in financial statements and improvements in corporate governance such as the addition of more outside directors with greater independence.