Paramount Group Stock Jumps on IPO This Week

Commercial real estate making a comeback on Wall Street.
5:08 | 11/21/14

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Transcript for Paramount Group Stock Jumps on IPO This Week
I'm Dan Kaplan new York and Astrid and Wall Street entered the last half hour for this Friday November 21. This story stock. Paramount group has the largest ever eyes peeled for a commercial real estate trust or REIT. Raising nearly 2.3 billion dollars for the office landlord owns a portfolio buildings in New York tempers it's going Washington. This successful IPOs highland some renewed interest. For some high yielding reits that'll explain why commercial real estate is making a comeback wanna bring that psalm not G from markets and a look at the nation's largest commercial real estate broker. Some I was with this school first of explain what exactly a REIT is. Great to be on the program with you thanks for having me on the writ really is a form of commercial rules did ownership. That can be a privately held firm or a publicly traded firm. And public reits have an advantage in that by tax law they have to distribute 90% of their taxable income as dividends so. They've been a very attractive way for owners to raise capital by going public. And a very attractive way for. Investors to benefit from both appreciation and the dividend yield so that's basically what it is there's also a lot of private reits out there that have been growing over the past several years. As that really a proxy for the strength in commercial real state. You look at a straight they're obviously indicative of Paramount's RPL them why the renewed interest why the comeback. Well commercial real estate has recovered. Extremely well especially in the last two years the down term was. Was a pretty severe one as you can imagine 20092000. Tempered very tough years because of the demand shock. And some of the you have property segments. Like for example retail and industrial. Warehouses were overbuilt quite a bit because of a lot of construction leading into the recession since then woven adding. Jobs at a steady pace right now we're adding to an after three million jobs here and that's the most important underpinning of demand for Hawkeye suspects. So we're seeing the renal demand for apartments were saying demand for hotels self storage units. Office buildings that were houses and shopping centers come back very strongly now that the economy is doing better and that's the fundamental reason. That the market's doing well and reits are doing well. We'll talk about that specifically what geography what role that plays in the attractiveness of these portfolios. Well for four large institutional owners like reits publicly traded reits. They really prefer to be in major metros coastal areas have been very attractive they really look at the capital markets. Sort of selection of major metros and and the gateway markets that tend to attract more institutional capital that's part of their exit strategy. So a lot of the smaller markets are not very attractive to to these types of investors. But so you have other markets and in the middle of the country for example Chicago is it was a major metro that that is very important for Reid ownership or Texas. The Dallas Houston even Austin are very very important Florida is a very important region. And of course that the coastal west and East Coast markets are important. The interesting thing to note though is that the vast majority of the marketplace of the commercial real estate market is owned by private high net worth individuals and small partnerships. That trade in the one to ten million dollars smaller type of assets so when we talk about pride publicly traded reits. It typically own a lot of the larger higher quality assets what about mall reads like Simon property for example of AA equally attractive. You know that they really are because if you look at the risk spectrum apartments are the lowest risk probably lowest return in that rental and it's been so strong. And apartments to tend to have a lot of lower of a risk factor. The look at shopping centers to tell us there that they're the dark horse because shopping center demand is actually coming back very strongly despite online sales. Despite all the concerns about how retailing is changing. The construction that I talked about earlier the overbuilding has disappeared and are not adding a lot of a new supply. Demand is catching up with that and players like Simon general growth. Other major players and retail have really benefited from that recovery in retail. On top of that brick and mortar retailers have done a great job controlling their inventory and are now an expansion mode vs the contraction mode they were in in 2010 and even when eleven. So retell looks great. So lesson and what are the dangers as specific to investors looking to get injuries. Well reads tend to be very interest rate sensitive that that dividend yield is an important part of it. And in 2013 when there is a lot of movement on interest rates and fears of further movement in interest rates. Reach for overly punished. But if you look at how efficient they are not pretty their properties and that underlying strength in the fundamentals of commercial real state. They should perform very well that the thing that concerns us the most is. You know some kind of a shock or some kind of a capital market disruption that would make interest rates go up very quickly and abruptly. Without the accompanying job growth and that's very unlikely to happen. All right some good words there is some nudging from Marcus and Milledge happen some like so much appreciate your time have a good weekend except me out. You know what he's story stock stay with related headlines and Dan Cutler in New York.

This transcript has been automatically generated and may not be 100% accurate.

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