The real estate investment trust industry is overdue for a "cleansing process" in which lagging companies sell out to private investors, a Fidelity Investments portfolio manager told a conference audience.

Steve Buller, who manages the $4.5 billion Fidelity Real Estate Investment Portfolio fund, said on a panel at Nareit's REITWorld 2019 conference that he has been "extremely disappointed" in recent years that more REITs have not gone private or otherwise sold themselves in cash transactions.

Buller noted that REIT share prices have been relatively healthy in 2019, making executives' reluctance to sell their companies more understandable. But, he added, "There are many companies today that still, even where REITs are trading, trade at a discount, and they should go away."

Thomas Grier, head of the real estate, lodging and gaming investment banking group at J.P. Morgan Securities, said on the same panel that there is a "huge" amount of private capital on the sidelines targeting real estate.

"You can get to $100 billion of equity very quickly," Grier said. "If you use your imagination, you can get to $200 billion to $300 billion of equity that is on the sidelines in some form."

Besides strategies targeting REITs, many of the same asset managers have core and core-plus funds that could invest in the space, Grier said. He added that multiple nontraded REITs are growing in scale and could emerge as larger players.

"I do believe we're going to be talking about a large-scale nontraded REIT that will be significant in size three to five years from now," he said. "There's probably more than one, but these will be large enterprises that will have low cost of capital and will have the ability to pivot in many different types of markets."

Blackstone Real Estate Income Trust Inc., which debuted in 2016, has led the nontraded REIT fundraising space in recent years, and in November completed a $4.25 billion joint venture acquisition of the real estate assets of the Bellagio in Las Vegas. Starwood Real Estate Income Trust Inc. launched in 2017.

Grier said 2019 has not been as active for M&A transactions as 2018, in part because a late-2018 dislocation in debt markets hurt CEOs' confidence entering the year. Transactions will continue as companies seek the benefits of scale, but "it will be episodic," he said. "You'll have to justify the synergies, which will be hard to come by."

While there have been multiple mergers in recent years, and large portfolio sales such as The Blackstone Group Inc.'s $18.7 billion purchase of the GLP Pte Ltd. industrial warehouse portfolio and its planned $5.7 billion purchase of a Colony Capital Inc. industrial portfolio, Buller noted that those transactions were not full company sales. He contrasted the environment unfavorably with the years before the last financial crisis, when cash privatizations in the REIT space passed $100 billion in volume — a significant percentage of the overall public REIT market at the time.

"It was a good cleanse. It got rid of management teams, it got rid of assets, and shareholders were happy about it," Buller said. Today, he added, "I think there are some management teams and boards that want to perpetuate their well-paid endeavors. So it's frustrating that we haven't seen more."

Grier noted in response that several of the private buyers in pre-2008 privatizations came to regret their purchases after markets crashed.

"Oh, that's fine," Buller said, to laughter from the audience. "That's their problem."