Nareit's REIT Report Podcast: Recent Episodes
Nareit
As part of Building to Zero, an ongoing series of interviews on the decarbonization of the commercial real estate sector, Duane Desiderio, senior vice president and counsel for the Real Estate Roundtable, joined a special episode of Nareit’s REIT Report podcast.
Desiderio spoke with Nareit’s Senior Vice President of Environmental Stewardship and Sustainability Jessica Long to discuss recent and upcoming activity related to federal policy that supports real estate owners’ efforts to measure and reduce carbon emissions, disclose climate-related financial risk and opportunity, and comply with local building standards.
Nareit Senior Vice President for Research Ed Pierzak joined the latest episode of the REIT Report podcast to talk about some of the key findings from Nareit’s 2023 mid-year report.
Pierzak noted that two main factors are at play today—the divergence in public and private real estate valuations, and challenges in the capital markets, particularly around refinancing.
The public-private valuation gap really reached its peak in the latter half of 2022, Pierzak said. Progress has been made since then, albeit slowly, he noted. However, whenever such valuation dislocations occur, “they can present opportunities for REIT investors…historically, when we’ve seen these major public and private valuation divergences, we see that REIT total returns have tended to bounce and even surge.”
Gene Rubin, president of management consultancy firm Rivel, joined the latest episode of Nareit’s REIT Report podcast to talk about strategic investor communications and investor engagement in the REIT space.
Rivel recently carried out a generalist investor perception study on the REIT industry and Rubin discussed some of the findings that emerged. He noted that the outlook for REITs as an investment class in North America has “improved significantly” since a similar survey was undertaken in 2018. In the previous survey, over half of respondents said they were underweight in REITs, compared to about 40% this time.
Darin Turner, managing director and chief investment officer for Invesco’s listed real assets team, was a guest on the latest edition of the Nareit REIT Report podcast.
Turner discussed the scope and growth of the tower REIT industry, its performance history, how the leasing structure works, the impact of 5G, global opportunities and challenges, benefits for the sector from AI and edge computing, and more.
Key Takeaways from the interview include:
- There are approximately 420,000 macro tower and small cell sites across the United States, with REITs owing about 90% of the approximately 150,000 macro tower sites.
- There hasn’t been any significant new development of macro tower sites in the last decade. New supply is “incredibly limited.”
- Most of the recent growth for tower REITs has been in international markets, in both emerging and developed markets.
Tim Bodner, global and U.S. real estate deals leader at PwC, was a guest on the latest episode of the REIT Report podcast.
Bodner commented on the current state of real estate transaction activity, how different property segments are faring, opportunities amid today’s challenging environment, strategies being used to get deals done, and more.
During the interview, Bodner noted that:
- It’s a “much more challenging” deal environment today than it was previously.
- Pockets of strength are emerging across the real estate landscape, including logistics, self-storage, areas of the hospitality sector, experiential real estate, and even office.
- The most important factor in terms of getting deals done today is the stability of the underlying trends that are driving activity in a particular sector.
Julie Whelan, global head of occupier research at CBRE, was a guest on the latest episode of the Nareit REIT Report podcast.
During the interview, Whelan discussed broad office occupancy trends, changes in how office space is utilized, the flight to quality, the role of flexible office space, the importance of an office’s location, and more.
Among Whelan’s key takeaways were:
- Net effective rents, that account for landlord concessions, are continuing to grow at the top tier of the office market.
- In some cases, the rent differential between top quality and lower quality office space has never been greater.
- A great office building alone isn’t enough. “Buildings have to be in great submarkets right now,” and that means mixed-use environments.
- “The office has a really exciting role to play in the future of how cities are reinvented.” Office space is going to be in a transformative phase as it plays a key role in the evolution of mixed-use locations.
Nina Galbiati, Norges Bank’s global lead sustainability for real estate, was a guest on a special episode of Nareit’s REIT Report podcast.
Norges Bank is a long-term investor that has roughly 4.1% of their global investment portfolio invested in real estate, with about half of that allocated to public REITs. With the firm’s focus on maximizing risk-adjusted returns, Norges has been an influential leader in promoting the adoption of sustainability for real estate companies globally for many years.
On this episode of the REIT Report, Galbiati joined Nareit’s Senior Vice President of Environmental Stewardship and Sustainability Jessica Long to discuss how the real estate industry is addressing a key challenge of decarbonization planning and the importance of real estate companies in the U.S. clearly disclosing their strategy, decision making, and targets around key environmental matters.
“Real estate is facing tremendous pressure to decarbonize. This is partly regulatory pressure, but it’s definitely coming from a shift in demand from tenants as well as investors. We don’t think the current market valuation is pricing those risks adequately today,” Galbiati said.
David Stafford, deputy chief investment officer at The City of Austin Employees' Retirement System (COAERS), was a guest on the latest episode of Nareit’s REIT Report Podcast.
During the interview, Stafford discussed COAERS’ decision to use REITs as part of a portfolio completion strategy starting in early 2020—an approach that has been successful for the fund and one that it continues to assess on an ongoing basis. He also spoke about the importance of having a mindset attuned to trying a new investment approach, the benefits that REITs provide to COAERS, market issues that COAERS is watching, advice for funds considering a change in strategy, and more.
COAERS is a defined benefit plan that administers retirement benefits for regular employees of the city of Austin and currently serves about 19,000 current, inactive, and retired members. The system’s investments total approximately $3 billion and are broadly diversified across asset classes including equities, real assets, fixed income, multi-asset strategies, commodities, and cash.
John Vojticek, global head of liquid real assets at DWS, a global asset manager with nearly $1 trillion of assets under management, was a guest on the latest episode of the REIT Report podcast.
Vojticek commented on the operating environment for listed REITs, DWS’s recommendations for using REITs in conjunction with private real estate to complete portfolios, the access REITs provide to emerging asset classes, the benefits of global investment in REITs, and more.
Uma Moriarity, senior investment strategist at CenterSquare Investment Management, was a guest on the latest episode of Nareit’s REIT Report podcast.
Moriarity spoke about how REITs are faring in the current interest rate climate, how their valuations compare to private real estate, REITs and their position in the capital markets, property sectors that CenterSquare is bullish on, and more.
A pause in interest rate hikes is generally expected to occur at the next Federal Reserve meeting, Moriarity said. While some are expecting a subsequent rate hike in July, “it’s fair to say that we're closer to the end (of the rate hike cycle) than we are to the beginning,” she added.
Andrew Duffy, co-founder, managing partner, chief investment officer, and senior portfolio manager of Ranger Global Real Estate Advisors, an independent investment advisor, was a guest on the latest episode of Nareit’s REIT Report podcast.
Duffy spoke about: the state of commercial real estate today and how Ranger Global distinguishes between the performance of geographies and property types; the appeal of next generation property types; the advantages and risks of investing domestically versus globally; the dislocation between listed and private real estate; and the benefits of investing in listed real estate funds.
As decarbonizing buildings becomes essential to achieving net zero emissions goals, the real estate industry needs to rebalance its efforts away from new building in favor of retrofitting existing buildings, says Jeremy Kelly, director of global research at JLL.
Speaking on the REIT Report, Kelly said retrofitting has to become “the new normal” given that about a 10th of global emissions are coming from new construction.
JLL has calculated that in mature cities, 80% of office buildings that exist today will still be standing in 2050. That means a retrofitting rate of about 3-3.5% of inventory every single year to meet net zero targets. However, that compares with retrofitting rates that are around 1% today. “So, we've got to triple, quadruple the rates of retrofitting,” Kelly said.
Constriction in the credit markets has caused real estate investment transactions to slow, but there’s still plenty of dry powder on the sidelines ready to execute as soon as clearer price discovery emerges, says Byron Carlock, real estate practice leader at PwC.
Speaking on the REIT Report, Carlock said that the current sentiment is one of cautious optimism. “Demand on the street from any of the product types is still quite good, especially multifamily, industrial, even the hotel sector. And frankly, retail is picking up again.”
Carlock discussed the sectors highlighted in PwC’s Emerging Trends in Real Estate 2023 report that are likely to be most insulated from economic uncertainty. Industrial was in first place, followed by multifamily. “Affordability of home ownership continues to suffer, so we’re moving to a greater renter orientation in our population,” he said.
The REIT industry is likely to see additional gains in GRESB performance in the years ahead, given that a number of listed REITs appeared in the benchmark for the first time this past year, says Dan Winters, senior director at GRESB.
Speaking on the REIT Report, Winters noted that in general, GRESB scores start to ramp up in year two and year three, “so I'm really expecting some additional increases in the REIT score in the years ahead.”
Winters also discussed how a flight to quality real estate assets is likely to characterize the next several years, with companies needing to offer a superior investment and occupant experience to maintain competitiveness.
Winters said that achieving those aims requires “a solid ESG program that's continuing to advance.” He added that the biggest threat to ESG is inertia, but that in the current economic climate the real estate industry is more likely to accelerate ESG-oriented efforts than pull back.
A growing need for more mid-market affordable housing, particularly in its targeted Sun Belt markets, has Elme Communities (NYSE: ELME), formerly WashREIT, anticipating its strongest growth in 20 years, says President and CEO Paul McDermott.
“That mid-market renter is really the deepest part of the demand curve, and we only see that curve growing,” McDermott told the REIT Report. While acknowledging the current volatile interest rate climate, he added that it doesn’t “erase the fact that there is a significant need for more affordable homes, especially in the markets that we're targeting, and in that particular rental band cohort that we're targeting also.”
Elme has been fully focused on multifamily since completing the sale of retail and office assets in 2021, although the REIT started messaging its intent to focus on multifamily back in 2016.
McDermott noted that households making between $35,000 and $75,000 comprise over a third of rental households in its targeted Sun Belt markets. However, the share of new product delivering into those markets since 2018 that's affordable to households making around $60,000 is 2% or less, he added.
REITs active in life sciences real estate are increasingly looking to complement their domestic portfolios with holdings in international markets where world-class scientists and strong infrastructure are creating a “vibrant ecosystem,” says Travis McCready, head of life sciences, Americas markets, at JLL.
“The life sciences market is increasingly going global, and from a REIT perspective, it's going global faster,” McCready told Nareit’s REIT Report. “I can't think of any of the leading REITs, publicly traded or private, that are simply looking at portfolios in the U.S. anymore. Everyone is looking for exposure across the Atlantic and across the Pacific.”
In addition to seeking ways to deploy capital, REITs are taking advantage of international markets that are “incredibly effective” at creating conditions ripe for life sciences innovation, McCready said.
Elsewhere in the podcast, McCready noted that from a venture capital standpoint, things are looking “quite good” for the life sciences market. However, “where the picture seems to change radically is when you start looking at the public markets, particularly IPOs, which for the life sciences ecosystem is somewhat of the lifeblood and the way that capital and exits are created.”
Healthy building environments have become an essential requirement for attracting and retaining tenants, and also for ensuring that real estate assets avoid becoming stranded for failing to meet baseline requirements, says Joanna Frank, president and CEO of the Center for Active Design (CfAD), operator of the Fitwel healthy building certification system.
Speaking on the REIT Report, Frank noted that “health is seen as essential. It is seen as table stakes. If you want to attract and retain tenants, you really need to be able to answer that question of ‘how is this a health-promoting environment?’”
For investors, Frank pointed to “a distinct possibility of having stranded assets, of actually seeing your asset become less valuable, if you aren't meeting that baseline for being a healthy building because your peers and your competitors are able to articulate that.”
Widespread acceptance that PropTech is an integral part of the real estate landscape today has helped accelerate the adoption of new tech solutions and paved the way for real estate stakeholders to act more nimbly than before, says Sarah Liu, partner on the Real Estate Technology Investment team at venture capital firm Fifth Wall.
“Instead of having to wait sometimes maybe more than a year in order to get a decision, we are seeing folks able to test and pilot technology with a speed to deployment of sometimes just a matter of weeks,” Liu told the REIT Report.
Liu noted that four or five years ago, the annual amount invested into PropTech was around $4 billion; by last year that number had risen to about $30 billion.
Turning to areas where Fifth Wall is collaborating with REITs in PropTech adoption, Liu pointed to investments in electric vehicle charging and property management, including maintenance and renovation. She noted that there are more opportunities for collaboration that haven't yet been tapped, or are still at the early stages, such as sensor tech and improved building management systems.
Inflation pressures, higher interest rates, and supply chain challenges have created a climate of uncertainty in which commercial real estate executives see revenues coming under pressure, according to Deloitte US Real Estate Leader Jeff Smith.
Speaking on the REIT Report, Smith said that Deloitte’s 2023 Commercial Real Estate Outlook, which is based on survey results for more than 450 CFOs, showed that 48% of respondents expect revenues to decrease in 2022. That compares with only about 9% expecting a decrease in the prior year’s survey.
Despite the anticipated decline in revenues, CFOs were “pretty positive” when it came to real estate fundamentals, Smith said. Over 50% of CFOs said they expect increased leasing and rental rates in the next 12-18 months, along with decreased vacancies, he added.
Making substantive progress on ESG issues involves going beyond individual corporate actions to encompass industry-wide efforts to bring about real change, says Mneesha Nahata, SVP, Legal & Chief Sustainability Officer at American Tower Corp. (NYSE: AMT).
Speaking on the REIT Report, Nahata noted that in addition to finding practical solutions, making investments, and innovating as a company, “it is really about working together and collaboration with other like-minded companies to make a substantive difference, whether that is working together to reduce greenhouse gas emissions, or bridging the digital divide to provide upskilling opportunities to underserved communities.”
Nahata said American Tower has placed sustainable operations at the core of its business. “We believe we can be champions of change in the industry and that requires addressing ESG holistically across our organization. And that includes at the very top.”
The recently enacted Inflation Reduction Act contains $369 billion in energy-related provisions, including new tax credit incentives that were previously unavailable to the REIT industry, says Nareit EVP and General Counsel Cathy Barré.
Speaking to the REIT Report, Barré points out that a number of obstacles have historically limited the ability of REITs to utilize tax credit incentives, with REIT tax credits typically going unused.
Barré points out that under the new legislation, however, REITs that make an eligible investment in EV charging stations, or geothermal and solar capability, will now have the full tax credit available to sell at the REIT level.
During the interview, Barré discusses how the legislation will impact REITs that invest in eligible sustainability-related projects. She also explains the nature of the tax credit incentives, and how REITs can qualify.
A corporate governance structure that includes board members that are independent, yet work as strong partners to the executive board, has clear long-term benefits for REIT performance, says Bill Ferguson, chairman of global professional services firm Ferguson Partners.
Speaking on the REIT Report, Ferguson said “it’s a fine balance…the board is there to be a fiduciary and represent the shareholders’ interests, but the bottom line is that they also need to be a good partner to the leadership team to make sure that the strategy and the execution of the business makes sense.”
Issues surrounding governance, in addition to a range of other ESG topics, will be explored at Nareit’s upcoming REITworks: 2022 Conference held on Sept. 12-13 in La Quinta, California.
With listed REITs trading at sizeable discounts to their underlying gross asset value, institutional investors should prioritize public real estate at this time, says Dave Bragg, co-head of strategic research at Green Street.
“Now is a great time to prioritize the public market as it is on sale,” Bragg told the REIT Report.
Bragg stressed the advisability for investors to have a dual mandate across the public and private real estate markets as it “really does maximize one's opportunity to generate alpha.”
Listed REITs have had meaningful declines this year, Bragg noted, but it reflects a broader trend, which is that “just about every asset that one can imagine has delivered a negative total return.”
Bragg also noted that capital flows are a key driver of the disconnect in public and private market values. Private market flows have remained robust in 2022 and may even match last year’s record-setting tally, he said. Meanwhile, flows into listed REITs “remain quite tepid.”
The sale of roughly half of PREIT’s (NYSE: PEI) portfolio of shopping malls, combined with the replacement of unproductive department stores with better performing assets, positions the company well for the future and makes a compelling case for investors, says Chairman and CEO Joe Coradino.
Speaking on the Nareit REIT Report, Coradino also commented on how PREIT is evolving its properties into community hubs.
“With assets in Philadelphia and Washington, D.C. that are well located, and with opportunities to do upwards of 4,000 apartments, [as well as] medical facilities and life sciences technology, our ability to attract either buyers or joint venture partners is pretty profound. It gives us a way to harvest capital and create value in these properties,” Coradino said.
Real estate deal activity is concentrating on sectors that can perform well in a rising rate environment or in periods of high inflation, with experiential-oriented assets in particular demand, says Tim Bodner, partner and U.S. real estate deals leader at PwC.
Speaking on the REIT Report, Bodner said PwC has continued to see activity building in the lodging space, as well as for casinos, marinas, and ski resorts. “All things that are tied to people being out.”
Bodner said PwC is anticipating robust deal activity in the back half of 2022, although it may be more episodic in the listed segment of the market.
The current environment has meant that there’s a lot more focus on underwriting, Bodner said. “Certainly, growth in rents and in NOI is something that folks are spending a lot of time putting attention on to make sure they feel good about their forward projections.”
Commercial real estate is in a position to take a leading role to advance the sustainability agenda, while regulation is also helping to move the whole industry forward, says Matt Ellis, founder and CEO of Measurabl, a provider of ESG data management solutions.
Speaking on the REIT Report, Ellis said there is a “tremendous leadership opportunity in our sector to really take advantage of the transition to green for the better of everyone—our occupiers and customers, our investors, and certainly ourselves as well. I think that we're in a good position to do it. We just can't slow down. We’ve got to speed up.”
Ellis described Measurabl, launched in 2013, as a “decade-long project to build the tools for measuring, managing, reporting, and ultimately acting on sustainability for the real estate sector.” He noted that there has been “a profound migration of organizations of every size around the world towards more sustainable business models. This is being done in just the span of a few years.”
The affordable housing crisis facing the United States today is not just a lower-income phenomena, but impacts individuals making six-figure salaries, says Kenneth Bacon, co-founder and managing partner of financial advisory and asset management firm RailField Partners, and former Fannie Mae executive.
Speaking on the REIT Report, Bacon, who also serves as board chair at Welltower Inc. (NYSE: WELL), said “if you pull back the covers and look at the data, you'll see that young professionals, people earning six figure salaries in cities like San Francisco and New York, are hard pressed to find places that they can afford.”
Bacon said the biggest problem behind the lack of affordable housing today is that the building process has become too long and difficult.
As for the state of the commercial real estate sector today, Bacon said that as interest rates rise he sees a return to a “more normalized investment ecology.” That in turn will mean that investors are “going to have to work a lot harder to get some of these returns. I think some deals just aren’t going to get done.”
Conditions in the lodging and hospitality real estate sector are healthy overall, but the combination of ongoing labor shortages, interest rate creep, and high construction costs are acting to soften margins, says Daniel Weede, partner in Morris, Manning & Martin’s hospitality, real estate, and real estate development & finance practices.
Speaking on the REIT Report, Weede noted that “there's a lot of optimism in this industry, and I think, at least for the next several years, that's likely to stay.” However, “margins are thinner,” he added.
Weede also discussed the potential for consolidation, noting that there will be likely be more merger and acquisition activity in the next 12 to 24 months than seen in the previous 12 to 24 months. “It's a healthy industry, but you've got some players that are doing really, really well, and others that are struggling a little bit.”
Phillips Edison & Co., Inc. is seeing a “really strong” operating environment across its portfolio, but the REIT also has a realistic view that there are going to be pressures weighing on the consumer from a range of macroeconomic factors, Chairman and CEO Jeffrey Edison said.
Speaking on Nareit’s REIT Report, Edison noted that questions from investors at Nareit’s REITweek: 2022 Investor Conference last week revolved around the theme of potential disruption to the current environment from factors including higher interest rates and inflation pressure.
“I think we have a realistic view that there are going to be pressures on the consumer from those macro events,” Edison said.
Commercial real estate continues to provide a solid hedge against inflation, a trend that has been borne out over multiple decades during periods when inflation has exceeded 4%, says Carly Tripp, global chief investment officer and head of investments for Nuveen Real Estate.
Speaking on the REIT Report, Tripp noted that Nuveen research shows that compared to other asset classes, commercial real estate was the only one that emerged with an overall net positive return during those inflationary periods.
“We always say real estate is an inflation hedge, and we're seeing that play through right now. So it's a good time to be in commercial real estate in my opinion,” Tripp said.
Consumers remain largely confident about their personal situations, despite a host of broader economic and geopolitical concerns, says Tom O’Hern, CEO of Macerich (NYSE: MAC). That sentiment is fueling sales and leasing volumes across the REIT’s portfolio of retail and mixed-use real estate.
“The resiliency of the American consumer is amazing, and it is once again on display. Shoppers have come roaring back to our centers to shop with a purpose,” O’Hern told the REIT Report.
During the first quarter, sales were 111% of what they were pre-COVID.
“Despite the economic uncertainty regarding inflation that we haven't frankly seen in decades, higher mortgage rates, a very volatile stock market, and the war in Ukraine, American consumers remain largely confident about their own situations,” O’Hern said.
Private equity funds, endowments, and large institutional investors will continue to have a large appetite for commercial real estate given the current inflationary environment and geopolitical uncertainty, says John Sullivan, chair of DLA Piper’s U.S. real estate practice and co-chair of its global real estate practice.
Speaking on the Nareit REIT Report, Sullivan said that asset classes with the ability to reprice themselves due to short lease cycles, such as multifamily and industrial real estate, “are viewed as a good bet because you can raise your rents to… at least keep up with inflation.”
Sullivan highlighted some of the findings of DLA Piper’s 2022 State of the Market survey, including that respondents see logistics, multi-family, life science, and data centers as offering the most attractive risk- adjusted returns for the next 12 months.
Global investment in U.S. real estate is at its strongest-ever level, with non-core markets and multifamily and industrial asset classes continuing to lead the charge in terms of investor interest, according to Gunnar Branson, CEO of AFIRE, the association for international real estate investors focused on commercial property in the U.S.
Speaking on the Nareit REIT Report, Branson noted that while there are certainly lots of concerns surrounding global events, “real estate investing is on a terrific pace in the first quarter.”
The top property asset class for institutional investors from around the world continues to be multifamily, Branson said, followed by industrial real estate. And while the office asset class will definitely continue to exist, questions remain about which offices are going to succeed, and which will have to rethink the level of capital investment that will be required to compete, he added.
A skills gap within the real estate industry means that to attract talent, firms must adopt human capital strategies that align with changes in employee expectations, says Gemma Burgess, president of Ferguson Partners.
Burgess will become CEO of Ferguson, a global professional services firm, on June 1. Speaking on the REIT Report, Burgess attributed a skills gap within the real estate industry to the fact that many mid-level professionals left the field in the wake of the global financial crisis. “We’re definitely facing a missing generation in our industry. That’s suddenly making the succession work more challenging,” she added.
Meanwhile, Burgess pointed to changes that have occurred in the workplace. “People want to work in different ways today. They want to work more flexibly. They certainly want to work within an environment where they feel like they belong and that there’s a culture that they believe in, and they can see a future for themselves.”
Although a return to the office has started in earnest, it will take the rest of 2022 to take hold, and even longer before clear patterns of usage emerge, says Julie Whelan, global head of occupier research at CBRE.
Speaking on the REIT Report, Whelan said it will likely be 2023 “before we can really start to hang our hat on trends that we can say are stable [in order] to build assumptions about what new work patterns are going to look like.”
Whelan described current office usage as “muted…but the good news is that it’s picking up.” Some of the Southern states have seen a higher return to office rate, although in the past week New York and Washington, D.C. actually saw some of the biggest gains, she noted.
Angel Oak Mortgage, Inc . (NYSE: AOMR) CFO Brandon Filson sees the non-qualified mortgage (QM) loan segment reverting over time to its historical level of about 10% of the overall mortgage market, compared to 2% today, providing the mREIT with significant opportunity for growth in the years ahead.
Speaking on the REIT Report, Filson noted that 10% of the overall market would be about $200 billion, versus about $25 to $50 billion today.
Angel Oak Mortgage, which went public in June 2021, focuses on acquiring and investing in first lien non-QM loans and other mortgage-related assets in the U.S. mortgage market. Non-QM loans are not backed by government agencies and are aimed at homebuyers unable to meet the strict criteria of a qualifying mortgage in areas such as income or personal debt.
Business models are central to corporate performance and wealth creation, and even the most complex models can be reduced to six basic variables, says Chris Volk, a veteran REIT executive, business leader, and author.
Speaking on the REIT Report, Volk discussed his upcoming book, The Value Equation, which will be published on May 10.
Volk also discussed his career, during which he introduced and led three public companies. One of those was STORE Capital Corp. (NYSE: STOR), his third net lease iteration, formed in 2011. Combined, the companies provided more than $20 billion in growth capital to thousands of businesses, he said.
Capital flow of non-traded alternative investments could grow to a $250 billion a year market within the next five years, with early 2022 data already pointing to a record-breaking year for fundraising in the sector, according to the Institute for Portfolio Alternatives (IPA).
Speaking on the REIT Report on April 18, Anya Coverman, SVP, government affairs and general counsel at IPA, said the outlook for 2022 is “incredibly bright. You have Blackstone, Starwood, and other large asset managers leading with a blockbuster year.”
Citing research data from Robert A. Stanger & Co., Coverman said sales overall are topping $19.1 billion in January and February. “So, this is already on pace to beat last year's record tally of $70 billion.”
Outside of the industrial sector, residential real estate in the United States “probably has the best supply-demand backdrop in global real estate right now,” says Ryan Dobratz, portfolio manager of the Third Avenue Real Estate Value Fund.
Speaking on the REIT Report, Dobratz said he sees “a significant amount of demand for single family housing, in particular within more affordable Sunbelt markets, at the same time that supply is very, very low.”
Companies active on the home building side are seeing benefits, Dobratz said, including timber REITs. Timber REITs are going to be able to generate much higher levels of cash flow and ultimately pay much higher dividends, given residential market conditions, he noted. “Timber is also a terrific place to be invested in an inflationary environment.”
Dobratz pointed to the war in Ukraine, supply chain issues, and high inflation as issues of macro concern right now. At the same time, he noted that “commercial real estate has historically been a great place to park capital and to protect it from inflation over time.”
Proposed Securities and Exchange Commission (SEC) rules to enhance and standardize climate-related disclosures for investors are just the first step in terms of finding the right balance of what's required from a regulatory perspective, said Uma Pattarkine, a senior investment strategy analyst and global ESG lead for CenterSquare Investment Management.
Pattarkine told the REIT Report that the SEC proposals were “a lot more robust than I had originally anticipated,” given the level of initial disclosure, and require REITs to be able to get a lot of that data at the property level.
Many REITs, Pattarkine said, are already committed to science-based targets. For such companies, the SEC proposals will not impose any additional burdens. However, for REITs that have been lagging in terms of collecting data, “it's going to take a lot of work for them to get to what the SEC might require from a disclosure perspective.”
Laurie Baker, COO at Camden Property Trust (NYSE: CPT), says the importance of gender equity and diversity within the commercial real estate industry has been amplified as a result of the pandemic.
Speaking on Nareit’s REIT Report, Baker said that while more women are rising to key leadership positions across the industry, the pandemic “in many ways stalled the progress that was being made because they [women] were disproportionately forced to choose between careers and caregiving for their family.”
At the same time, Baker said, the pandemic also presented opportunities in the form of new forms of flexibility and “resetting definitions of career satisfaction and what company success and personal success is.”
Baker, who was named COO in late 2021, also reflected on her more than two decades at Camden, including her work implementing pioneer revenue management technology as well as helping to create Camden’s first investment funds.
Dallas Tanner, president and CEO of Invitation Homes Inc. (NYSE: INVH), says the REIT’s $250 million investment in Pathway Homes will expand choice in the housing market by helping first-time homebuyers who lack access to traditional avenues to home ownership.
Speaking on the REIT Report, Tanner said Pathway, launched in partnership with Regis Group and Fifth Wall, is an opportunity to support a growing segment in the marketplace—individuals that want a lease option purchase agreement or the chance to build equity in a home over time.
Pathway works directly with customers to identify and purchase a home, offering them the opportunity to first lease and then buy the home outright at a future date. In addition to investing in the homes and technology platform for Pathway and its real estate fund, Invitation Homes will provide maintenance and other services to all Pathway homes, enabling the REIT to broaden its third-party property management services.
Committed leadership and statements backed up by substantive action are key to ensuring that organizations make progress on diversity, equity, and inclusion (DEI), according to Kira Banks, co-founder of the Institute for Healing Justice and Equity at Saint Louis University, where she is also an associate professor in the department of psychology.
Speaking on the REIT Report, Banks notes that since George Floyd's murder in 2020, more leaders in business are understanding that DEI is core. “They understand it is a part of the work of doing business nowadays.” However, the work won’t be sustainable unless leadership is fully committed, Banks says. “If leadership is not on board, it gives other people an opportunity to opt out.”
Banks also says that more organizations are understanding that symbolic statements are insufficient and must be backed up with action. “Those sorts of symbolic gestures in some ways can do more harm than good if they're disingenuous, if they're not followed up by anything substantive,” she notes.
Anticipated interest rate increases of about one and a half percentage points by year-end will still create a “very favorable” environment for commercial real estate, says Nareit Senior Economist Calvin Schnure.
Speaking on the Nareit REIT Report, Schnure noted that it is “appropriate” for the Federal Reserve to be raising interest rates at this point and removing the stimulus that was put in place early in the pandemic.
Schnure noted that goods inflation has been at about 12% over the past year, while service price inflation has slowed somewhat. “This suggests that we're not having a long- term problem from wage pressures with inflation. I do expect inflation to slow down, mostly in the second half of this year,” he said.
REITs, Schnure said, perform better than most other sectors during periods of moderate to high inflation because they represent a real asset that own properties whose values rise with prices and with leases that can respond to changing market conditions.
Transaction activity in the hotel sector this year is expected to be “incredibly strong,” with robust pricing continuing in the luxury resort segment and the start of a recovery in business transient and group demand, according to Kevin Davis, CEO of JLL Hotels & Hospitality, Americas.
Speaking on the REIT Report, Davis noted that JLL has more than $12 billion in its U.S. hotel sales and financing pipeline for 2022, the highest level since 2015, which was already a record year from a transaction volume perspective. If JLL is a proxy for the market, “my expectation is that you'll see a lot of transactions this year.”
Davis said anticipated gains for 2022 follow a particularly strong year for the industry in 2021. This was fueled by the large amount of capital that had aggregated on the sidelines to take advantage of potential distress in the sector—which never materialized—as well as pent-up consumer demand for travel.
Investing in the farmland sector offers stability, strong income, good total returns, and inflation hedge characteristics, among other benefits, according to Martin Davies, global head of Nuveen Natural Capital.
Speaking on the REIT Report, Davies also noted that “one very compelling theme is not being correlated to the economic cycle. Through the COVID-19 pandemic we’ve seen no dip-off in farmland returns. As we’ve seen historically through other economic crises, such as the global financial crisis and the tech bubble, farmland returns stayed strong through that period.”
Davies noted that while land values historically have been a function of what was actually produced, going forward there could be increased opportunities to monetize some of the additional benefits that exist, including water quality, biodiversity, and carbon sequestration.
The data center sector is playing a significant role in getting utilities to increase the use of renewables across the electricity grid and bring about the larger goal of a 90% carbon-free electricity system by 2030, according to Breana Wheeler, director of operations at BREEAM USA.
Speaking on the REIT Report on Jan. 24, Wheeler noted that the focus on decarbonizing the grid is “really critical, because while reducing energy consumption is important, data centers specifically will always face significant challenges to either build enough renewables to cover total usage or build close enough to an abundant supply of renewable energy.”
Wheeler also discussed how BREEAM’s relationship with the data center sector has developed over the years, whether the general perception of data center energy consumption fits the reality, and how the data center sector is having a positive knock-on effect in terms of making other industry sectors improve their sustainability performance.
Prologis, Inc . (NYSE: PLD) Global Head of Capital Deployment Dan Letter says ongoing efforts by companies to rebuild inventories to pre-pandemic levels, and a focus on resiliency rather than efficiency in the supply chain, will create multi-year tailwinds for the REIT.
Speaking on the REIT Report, Letter noted that inventory to sales levels are 10% below where they stood pre-pandemic. “Our customers are just trying to get back to the pre-COVID levels, let alone build that new safety stock on top of that,” he said.
Letter said he expects supply chain challenges will persist into 2023. Vacancy rates are at unprecedented lows and space in Prologis’ markets is effectively sold out, he added.
Prologis continues to see broad based demand in markets around the globe, according to Letter. The REIT is planning to start over $5 billion in developments this year, and also expects to make about $1.5 billion in acquisitions. In addition, Prologis’ land portfolio will allow it to develop over $26 billion of new product.
With a footprint heavily weighted toward the Sunbelt, plus an expanding portfolio of necessity retail assets, Michael Weil, CEO of American Finance Trust, Inc. (Nasdaq: AFIN), says the REIT is well-positioned for 2022 and beyond.
Speaking on the REIT Report podcast Jan. 12, Weil said the company’s proposed $1.3 billion acquisition of shopping center assets from subsidiaries of CIM Real Estate Finance Trust, Inc., combined with its upcoming rebranding to The Necessity Retail REIT Where America Shops, spells out its clear focus on a particularly active corner of the retail sector.
Since the REIT’s listing on Nasdaq in 2018, it has focused on single tenant and multi-tenant retail, with the latter in the form of open-air shopping centers.
“We think it's an incredibly viable, strong asset class and it creates a portfolio that has terrific underlying strength,” Weil said. Over the last four or five years, as the REIT has continued focusing on necessity retail, it has grown from about $3.4 billion of assets to a projected $5.1 billion.
The REIT industry is closing out 2021 in a position of strength, with ample financing available, brisk merger and acquisition activity, high and rising rents, and elevated asset levels, according to Evan Hudson, partner and real estate capital markets legal expert at Stroock.
“The credit markets are incredibly active, they’re liquid, they’re deep,” Hudson said. He noted that in addition to common and preferred equity deals, largely through at-the-market (ATM) offerings, his firm is also seeing a high level of joint venture activity.
Following a productive year for M&A deals in 2021, Hudson expects all property sectors to be active in 2022. “Even though we have price agreement (between buyer and seller) and the price is very high, a lot of deals are still happening.” He stressed that what is new in the current environment is the entrance of “colossal” non-traded REITs with hefty amounts of cash to deploy.
The economy will enter 2022 on a firm footing and should be able to withstand a variety of challenges that have emerged in recent months, providing a backdrop for continued solid REIT performance, says Nareit Senior Economist Calvin Schnure.
Schnure noted that the economic mood has shifted over the last couple of months, reflecting the new Omicron COVID-19 variant, supply chain issues, price spikes, and labor shortages, among other issues.
“Overall, though, the economy is quite sound. It has a lot of strength and should be able to handle these challenges pretty easily in the year ahead,” Schnure said, particularly since many of the current challenges are related to the pandemic and should ease as COVID cases come down.
As for the hot topics of inflation and interest rates, Schnure pointed out that inflation is still very connected to short-term bottlenecks. “We’re going to see continued concern about inflation, which the Fed is going to be watching closely,” he said, with gradual increases in interest rates likely to begin around the middle of next year.
Total REIT M&A activity through the third quarter of 2021 has already surpassed levels seen in 2019 and 2020, boosted by price recovery, attractive financing, and renewed pressure from activist investors, says Blake Liggio, partner in the real estate industry group of global law firm Goodwin.
“Pricing for deals has improved coming out of the pricing troughs that we saw in many sectors during the pandemic… over the last two years it has been more challenging for boards to justify a sale of the company,” Liggio said. The current pace of deal volume, supported by low interest rates and attractive financing, is likely to remain intact through the end of the year, he added.
The industrial, self-storage, data centers, multifamily, and life science sectors continued to see M&A activity from the end of 2019 and largely throughout 2020, Liggio said. In 2021, other sectors such as retail and office, have regained activity or begun to think about entering into a transactional strategic review.
The hotel and lodging sector is showing a varied recovery, as it outperforms 2019 levels in some areas but struggles in others, according to Pebblebrook Hotel Trust (NYSE: PEB) Chairman, President, and CEO Jon Bortz.
Speaking on Nareit’s REIT Report, Bortz noted that strength in the market has tended to be concentrated in resorts, particularly drive-to resorts, which are often achieving higher occupancy and rates than seen in 2019.
The struggles, on the other hand, have mainly been in the urban environment, Bortz said. He noted that in San Francisco, Pebblebrook’s revenue is still down 80% from 2019 levels, while in Washington, D.C., revenue is down 70% over that same period.
Bortz said signs of recovery in business travel are already evident, “but it’s a very slow recovery.” He said business transient travel appears to be about 40-50% back, while business group travel is about 30-40% back.
The real estate industry needs to collaborate and embrace technology as it works to reduce carbon emissions or else face having external mandates forced upon it, says Peter Gajdoš, a partner at venture capital firm Fifth Wall.
Speaking on the Nareit REIT Report, Gajdoš, who co-leads Fifth Wall’s climate technology investment team, noted that although tackling carbon emissions will take decades, the real estate industry should see it not as a threat but as an opportunity to cooperate. “Let’s work together, let’s find solutions because otherwise I believe the sector will be mandated to fix the carbon problem and I’d rather see the sector proactively working on this and finding solutions ourselves rather than a top-down approach from the government,” Gajdoš said.
Increased customer demand for logistics labor, combined with rising worker expectations around training and career opportunities, has led Prologis, Inc. (NYSE: PLD) to expand its logistics training program to six major logistics hubs, with plans to add programs in nine additional national markets by the end of 2021.
Speaking on Nareit’s REIT Report, Steven Hussain, vice president of workforce programs and community relations at Prologis, explained that the REIT’s Community Workforce Initiative (CWI) training program launched in 2018 in response to conversations with Prologis’ largest customers that identified labor and talent as their number one pain point. At the same time, Prologis’ community partners were looking for “on ramps” to well-paid jobs for individuals they served.
Since then, the labor market has become even more challenging, Hussain explained. “It’s incredibly competitive and incredibly challenging to recruit right now and worker concerns around COVID-19 persist and safety is top of mind. At the same time, worker expectations around ongoing education, training, and career paths are also rising, so there’s a lot that customers and employers are having to do to adjust to this new reality,” he said.
Farmland real estate is one of the nation’s largest commercial real estate sectors and its low risk and volatility profile makes it a “great hedge” within a balanced portfolio, says Pierre Rigaud, vice president, advisory and consulting, at Green Street.
Speaking on the REIT Report, Rigaud noted that the farmland real estate sector is valued at $2-3 trillion. Institutional ownership in the sector is only about 1%, compared with 5-15% in most other real estate sectors. The two key crops in the sector are row crops and permanent crops, with row crops having a lower risk profile than permanent crops.
Rigaud said farmland real estate and how it compares to other asset classes is not well understood by investors at this time. Some of the key attributes of farmland real estate include its lower obsolescence risk, lower fungibility risk, and lower capex burden.
Population growth has outpaced the supply of arable land, Rigaud noted, resulting in land appreciation. As a result, “U.S. farmland has had a very strong track record of delivering relatively attractive returns over long holding periods.”
The landscape for real estate fundamentals looks “very favorable” going forward, supported by GDP and employment growth, according to Lowell Bolken, portfolio manager of the Securian AM Real Asset Income Fund and Real Estate Securities Fund.
“We think employment will be strong as job openings are still above the actual unemployed population right now,” Bolken told Nareit’s REIT Report.
He noted that in terms of REIT valuations, it’s a mixed picture. However, “we're very confident where the economy is going in terms of real estate and other sectors…growth is still in the offing.”
Bolken, meanwhile, noted that while inflation might not last longer term, “it's less than transitory.” As a result, Securian is positioning itself for short term inflation by focusing on assets with shorter term leases such as apartments, self-storage, and hotels, while de-emphasizing the net lease sector.
Jonathan Morris, adjunct professor in Georgetown University’s Master’s of Real Estate program and a former REIT executive, believes the continued success and evolution of the REIT industry highlights the need to enhance the level of understanding of the REIT structure and what makes it work so well.
Speaking on the REIT Report, Morris said he has launched a new education platform, REIT Academy, to fill the void in executive and professional development education in the REIT industry. The inaugural program spans eight weeks, comprised of one evening per week for three hours of live instruction, as well as guest speakers from the industry.
Morris said the program will give a student “pretty much everything you need to know to be able to understand any given REIT and come to your own conclusions, using the tools that you'll learn here to assess how to value the company.”
Investors who own their own homes may be taking a limited view of real estate investment, and in turn are missing out on the benefits of owning commercial real estate through REITs, according to Nicole Funari, Nareit vice president of research.
Speaking on the REIT Report, Funari noted that oftentimes homeowners think they are already invested in real estate simply by owning their own home. While that is true, they also need to examine the differences between homeownership and owning commercial real estate, she said.
“They think they are covered in their investment portfolio when we feel that, no, you really are missing out on the benefits of commercial real estate,” especially because a lot of homeowners don’t consider the breadth of commercial real estate asset classes, Funari said.
REITs have convincingly outperformed private equity real estate funds in head-to-head matchups over a 20-year sample period from the first quarter of 2000 to the fourth quarter of 2019, according to Tom Arnold, a visiting scholar at the University of Florida’s Warrington College of Business.
Speaking with the REIT Report, Arnold highlighted the results of new research, sponsored by Nareit, that he carried out with fellow academics David Ling and Andy Naranjo at the University of Florida.
Arnold explained that one of the main takeaways from the research is that even with no risk adjustments, 53% of the time investors would have been better off in the REIT index during the period that the private equity real estate fund was investing. The mean out-performance was 165 basis points, or 1.65 percentage points, per year. With a conservative investment for relative risk, REITs outperformed nearly 70% of the time, and their outperformance grew from 165 basis points per year to almost 600 basis points per year.
REITs can help provide access to the new economy sectors—such as cell towers, data centers, and networked logistics properties—that complement the traditional real estate property types, according to
Todd Kellenberger, client portfolio manager, real estate securities at Principal Real Estate Investors. Kellenberger noted that the idea of using REITs to gain access to these new economy sectors as part of a portfolio completion strategy has garnered increased attention from institutional investor clients recently.
Kellenberger joined guest host Meredith Despins, Nareit’s senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss the role REITs can play in building a successful 21st century real estate investment portfolio.
As technological innovation results in more efficient supply chain distribution, changes are also occurring in traditional concepts of industrial real estate and where it should be located, says Steve Weikal, lecturer, researcher, and the CRE Tech lead in the MIT Real Estate Innovation Lab.
“Certainly what the industry thinks of as industrial real estate, or warehouse distribution real estate, has changed and will continue to change,” Weikal said on the REIT Report podcast.
“If we are able to use technology to provide distribution more efficiently, more effectively, and in smaller spaces, which is very often the case, can we now do that in structures and in buildings that we hadn't considered before?” Weikal said.
The proliferation of specialized data has enabled the industry to determine “the kinds of buildings that we need, the shapes, the sizes, and especially where they need to be located in order to make the global distribution system more efficient,” Weikal noted.
A global pandemic, major climate events, and a focus on social change have combined to create “unprecedented” demand for talent to fill sustainability and ESG positions, says Shelly Fust, co-leader for Korn Ferry’s global Sustainability and ESG Solutions Center of Expertise.
Speaking on the REIT Report, Fust described sustainability and ESG as “a very big tent,” requiring talent from all sectors and all levels to fill the demand being created by this accelerating market. “There's so much momentum underway in this space. I believe truly that anyone who has the passion and interest in this sector can find a very rewarding career,” she added.
Fust noted that corporate sustainability roles were really just being created about 15 years ago and were relatively thinly staffed at the top corporate level.
“Many of those first chief sustainability executives are now preparing to retire. And as we're having to then magnify these roles across just about every organization, we’re finding that there's significantly more demand than there is talent,” Fust said.
The recovery in the leisure travel sector continues, despite concerns over new COVID-19 variants, while a similar trend in the business travel segment is yet to emerge, according to Jim Sullivan, managing director and REIT analyst at BTIG.
Speaking on the REIT Report, Sullivan said that as of mid-August, “we have not seen any material decline. Traffic volume is holding up pretty well in the face of the Delta variant concerns.”
Sullivan said Transportation Security Administration (TSA) data point to a “pretty consistently high” level of comfort in traveling, particularly for the leisure traveler. Recovery in the business sector is going to occur later, however.
One reason the leisure market is seeing strong demand is the new flexibility provided to travelers who are able to work remotely, Sullivan noted.
Conditions remain healthy for real estate investment, with inflation expected to be transitory and any increase in long-term interest rates likely to be modest, according to Carly Tripp, global chief investment officer and head of Nuveen Real Estate Investments.
Speaking on the REIT Report, Tripp said that although inflation had been felt in terms of cost fluctuations for building materials, Nuveen’s view is that inflation is transitory. “Overall, we’re not concerned at this point and continue to see a recovery across the board with some of these supply/demand imbalances expected to rectify over the next two or three quarters.”
Tripp noted that interest rates remain “extremely attractive,” despite expectations of rate rises for the past decade. While the Federal Reserve has indicated it has no plans to increase short term rates anytime soon, long term rates, which are dependent on the market, are not posing a problem either, she added.
Recent REIT M&A activity underscores the resiliency of the real estate sector and more transactions are likely this year as conditions remain favorable for continued deal-making, experts at Deloitte say.
Lynn Kawaminami, partner at Deloitte Tax, and Nathan Florio, principal at Deloitte Transactions and Business Analytics, spoke to the REIT Report on July 20.
“All the activity that we’ve seen this year has really underscored the resiliency of real estate…even the sectors that struggled last year are starting to come back,” Kawaminami said. “The fundamentals are good, and I think we’re ready to get back to normal.”
Reliance on mass transit is playing a key role in determining the pace at which office markets across the country re-populate, says Julie Whelan, head of occupier research for the Americas at CBRE.
Speaking on the REIT Report, Whelan noted that Texas is currently experiencing probably the largest return to the office, despite vaccination rates in some parts of the state lagging the national average. Other markets, such as California and New York, have higher vaccination rates but are returning to the office more slowly because of mass transit dependance, she added.
More focus needs to be placed on getting people comfortable on mass transit again and getting it back to normal schedules and routes. “It’s an essential piece of getting people back to work,” she said. Until that happens, “reduced ridership is really only going to sustain that reduced occupancy in buildings that we’re seeing.”
Whelan said best estimates point to current office occupancy at only a third of what was considered normal pre-pandemic. That is expected to change in the fall, however, as “the leisure of summer is going to abate and we’re going to get back into that normal routine.”
Real estate deal activity is accelerating in sectors with strong macro tailwinds, along with increased confidence in the public markets toward valuations, according to Tim Bodner, partner and U.S. real estate deals leader at PwC.
Speaking on the REIT Report, Bodner said property sectors including logistics, multifamily, and life science have all seen increased deal flow. Office assets located in technology-oriented cities have also seen increased activity, while the leisure and hospitality sectors have also experienced a rise in transactions.
“There continues to be an incredible amount of capital on the sidelines” on both the debt and equity side, Bodner said. He also pointed to an “incredible amount” of capital being raised by public non-listed REITs, which topped $3 billion in May.
Fundamentals for U.S. REITs have moved beyond COVID-19 “very distinctly,” with market rent growth, occupancy gains, and cash flow rebound evident across a range of sectors within the industry, according to Cedrik Lachance, director of global REIT research at Green Street.
Lachance, who assumes his new role as Green Street’s director of research on July 1st, spoke on the REIT Report.
From a GDP perspective, 2021 is a “year of rebound,” Lachance said. He noted that manufactured homes and industrial real estate are two sectors that Green Street believes will have the best combination of market rent growth and occupancy gains over the next five years.
From a cash flow perspective, a significant rebound is also occurring in sectors that were negatively affected during the pandemic, including senior housing and lodging, Lachance said. At the same time, he pointed to “very attractive sustainable growth” for the next few years in sectors such as apartments and student housing. A number of other sectors should experience net operating income (NOI) growth in the 4-5% range for the next couple of years, he said.
Turning to M&A activity, Lachance noted that, particularly in the public markets, deals have tended to occur between companies with a disparity in the cost of capital. Those deals “make a ton of sense,” he said. Going forward, M&A activity is most likely to occur between companies that have notable similarities but a relative difference in their cost of capital, he noted.
As for the future of office, Lachance said that Green Street views work from home “as really the defining story of the real estate world in the pandemic,” and one where the influence extends to a range of other real estate sectors including residential, hotels, and suburban shopping centers. Lachance said the lack of clarity into the future of the office sector will likely last for another 12 months, but “when it’s all said and done, you’ll have about a 15% drop in office demand.”
Lachance also commented on trends in European real estate, including the growth of non-traditional sectors. As for broader trends, he noted that Green Street firmly believes that public markets will remain an area of growth for REITs. Lachance also commented on the inflation hedge benefits of real estate.
High-quality office real estate in New York continued to attract investor interest throughout the pandemic, and the office market overall is “certainly improving,” according to Nadir Settles, head of New York office investment at Nuveen Real Estate.
Speaking on the REIT Report, Settles noted that while there hasn’t been a lot of price discovery during the past year, the few transactions that did occur, notably for high-quality assets, did well. “Investors showed that they are willing to come to New York for the right product, even if it was office,” he said.
Settles said the New York office market has seen about a 10% drop in rents, “which is not bad for where we thought we were going.” Tenant improvements have increased substantially, while concessions have been made to attract tenants, he noted. Tenants are ready to commit quicker on turnkey space, he said, but they also want flexibility on how the deal is structured.
In a REIT Report podcast interview, Robert L. Johnson discusses his early career, his business strategy, and his insights regarding race in America. Johnson is the founder and chairman of The RLJ Companies, LLC, which sponsored the formation of RLJ Lodging Trust (NYSE: RLJ), and the founder of Black Entertainment Television (BET).
During the interview with Nathaalie Carey, Nareit senior vice president for industry affairs and social responsibility, Johnson discusses his coming of age at a time when the United States was “opening doors to Black Americans,” and his underlying belief that “you have an obligation to live up to the tenets of society to make the whole community better."
REIT industry ESG data continues to improve both in quality and quantity, yet the lack of standardization remains a challenge, according to Bradford Stoesser, senior managing director and global industry analyst at Wellington Management.
In a REIT Report interview, Stoesser said REIT ESG data is “markedly better than even just a few years ago.”
“We are starting to see a proliferation of data providers and while more ESG data is a positive, quality and standardization are important, allowing for effective comparisons,” Stoesser said. He noted that companies largely self-report, meaning that transparency is often lacking.
Data providers, meanwhile, measure ESG differently and often are not clear in terms of the specific subcategories of E, S and G, and how they are measured, Stoesser explained. “The risk is that investors end up with very different impressions of a corporate’s ESG (information) based on the data they source,” he said.
The authors of a new book on REITs and real estate investment, Educated REIT Investing, say it is the first of its kind to target academic institutions, while still being concise enough to attract a general audience.
The book is co-authored by Stephanie Krewson-Kelly, vice president of investor relations at Corporate Office Educated REIT InvestingProperties Trust (NYSE: OFC), and Glenn Mueller, a professor at the University of Denver’s Franklin L. Burns School of Real Estate and Construction Management, and a real estate investment strategist at Black Creek Group.
The book updates Krewson-Kelly’s 2016 book, The Intelligent REIT Investor, and includes new chapters by Mueller. Nareit Senior Economist Calvin Schnure and Merrie Frankel, president of Minerva Realty Consultants, also contributed to the book.
With 100% of its ground lease rents paid in 2020 and newly-received investment grade credit ratings, Safehold Inc. (NYSE: SAFE) Chairman and CEO Jay Sugarman says the REIT is “really well positioned to keep growing.”
Speaking on the REIT Report, Sugarman noted that despite the challenges of 2020, “last year actually proved how strong the business is.” Meanwhile, new ratings from Moody’s Investors Services and Fitch Ratings “will be a pretty major competitive advantage,” he added.
Sugarman noted that when it comes to selecting particular property types, “our mission is to go where the best markets and land is.” Multifamily has been a “great story so far,” and represents about 25% of the portfolio, he said. “I imagine we’ll be in all property types in the top 30 markets in the next year or so.”
Social media site Clubhouse is emerging as a new and innovative way to facilitate education about commercial real estate and to provide networking opportunities for individuals across the industry, according to David Auerbach, an institutional trader at World Equity Group, Inc.
Clubhouse is an invitation-only iPhone social media app launched in 2020 that enables users to join live audio discussions on a range of topics hosted in ‘rooms’ on the Clubhouse platform. Participants can enter the various rooms as an audience member and can join the conversation by digitally raising their hand to the host.
Speaking on the REIT Report, Auerbach discussed his own involvement with Clubhouse, which includes hosting daily discussions on a variety of REIT and real estate-related topics with his partner, Yoni Miller.
Nareit’s T-Tracker fourth quarter 2020 data indicate that the REIT industry is recovering from its weakest levels seen during the pandemic.
Speaking on the REIT Report, Nareit Senior Economist Calvin Schnure said the REIT industry is “showing a good continuing recovery, not a complete recovery, but a recovery from the worst part of the pandemic a year ago.”
According to the T-Tracker, funds from operations (FFO) of all equity REITs gained 11.3% in the fourth quarter from the third quarter, which itself was 10.3% higher than the second quarter. The recovery is not uniform, Schnure pointed out. Earnings for sectors at the front line of the shutdown, such as lodging and retail, continue to be quite weak. Other sectors have benefitted, namely those that support the digital economy, as well as industrial.
Differences in how real estate sectors perform have never been as “profound” as they are today, according to Michael Sonnenfeldt, founder and chairman of TIGER 21, a peer membership organization of high net worth current and former entrepreneurs, investors, and top executives.
TIGER 21 members collectively manage personal assets of over $85 billion.
Speaking on the REIT Report, Sonnenfeldt described the current situation in real estate as a “tale of two cities,” with retail “in a difficult strait” and industrial “on fire.”
Sonnenfeldt explained that real estate has been the number one asset allocation for TIGER 21 members since the group was founded in 1999—and is likely to stay that way. Currently, real estate accounts for 27% of TIGER 21 portfolios and is favored by members due to its unique benefits and member expertise in the field, he said.
Matt Ritter, senior research consultant for NEPC, joined guest host Meredith Despins, Nareit senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss how REIT-based investment can deliver access to a 21st century real estate portfolio.
NEPC is an independent investment consultant and private wealth advisor. Its clients—including public pensions, corporate pensions, endowments, foundations, health care groups, and private wealth—collectively represent approximately $1.1 trillion in total assets. Ritter is a member of NEPC’s Real Assets Research Group and the Portfolio Construction Lead for the Real Assets Beta Group.
Speaking to the challenges clients are facing in their real estate portfolios today, Ritter noted that many clients—particularly those with net outflows—are seeking durable income and are asking “what’s the future of my existing portfolio going to look like?”
Historically, many institutional investors have accessed real estate through private markets, which focuses on the four main property types: Office, Apartments, Retail, and Industrial. “We’re seeing a pretty wide range of returns and expectation by property type. This was a trend that was evident prior to the pandemic, but has really accelerated over the past year,” he observed.
The data center industry holds a leadership position on climate change issues as technological advances create greater efficiencies while economies of scale result in a lower energy profile, according to Kyle Myers, senior director of environmental health, safety, and sustainability at CyrusOne, Inc. (Nasdaq: CONE).
Speaking on the REIT Report, Myers pointed to estimates that 1-3% of the entire power consumed on earth is consumed within data centers.
CyrusOne has set a goal of reaching zero carbon emissions by 2040 across the organization. Myers said innovation on the design side is “super important,” while CyrusOne is also looking at existing efficiencies across the portfolio, such as infrastructure and operational improvements.
Past racially-explicit policies by federal, state, and local governments—especially those concerning housing—imposed a level of segregation on the United States that was so powerful it still determines the racial landscape of today, according to Richard Rothstein, author of The Color of Law: A Forgotten History of How Our Government Segregated America.
Rothstein is also a distinguished fellow of the Economic Policy Institute and a senior fellow (emeritus) at the Thurgood Marshall Institute of the NAACP Legal Defense Fund.
In a wide-ranging conversation with Nathaalie Carey, Nareit senior vice president for industry affairs and social responsibility, Rothstein pointed to the government’s deliberate move after World War II to create white suburban communities across the country as a key factor in preventing the accumulation of wealth and advancement of the African American population.
Following a breakout year for special purpose acquisition companies (SPACs) in 2020, activity is forecast to remain brisk in 2021, with REITs expected to take a keener interest in the structure, according to Jocelyn Arel and Audrey Leigh, partners at Goodwin.
SPACs are a pool of capital formed through an initial public offering (IPO). SPAC sponsors go through the traditional IPO process, complete with Securities and Exchange Commission (SEC) review and roadshows, Arel, a partner in the firm’s Technology Companies practice and leader of the firm’s SPAC practice, explained. The capital is then placed into trust and is available to combine with an operating company and fund that company’s IPO, referred to as the SPAC-IPO.
“People are looking at the structure as an efficient way to take companies public and as an alternative to the traditional IPO or direct listings. In essence it’s really giving companies optionality in terms of how they want to approach the market,” Arel said.
Fourth quarter GDP data released by the Bureau of Economic Analysis underscores the continued pressure facing the services sector, although a surge in spending is likely once vaccines bring the pandemic under control, Nareit Senior Economist Calvin Schnure says.
Speaking on the REIT Report, Schnure noted that GDP growth in the fourth quarter of 2020 slowed to a 4.0% annual rate after a record 33% in the third quarter.
Some slowing was inevitable, Schnure said. He noted that a large divergence remains in place between the services and goods sectors, with the decline in services spending accounting for almost all of the decline in fourth quarter GDP compared to before the pandemic.
While an economic recovery is expected to take hold, benefitting commercial real estate in its wake, any significant improvement is likely to occur starting in the second half of 2021, according to Nareit Senior Economist Calvin Schnure.
Speaking on the REIT report, Schnure highlighted some of the key themes of Nareit’s 2021 Outlook for REITs and Commercial Real Estate.
Schnure noted that “we’re going to see some strengthening of the economic recovery and that’s going to benefit the commercial real estate markets quite a bit.” However, the improvement will really be driven by vaccines bringing the pandemic under control, which is not expected before the second half.
INDUS Realty Trust, Inc. (Nasdaq: INDT) President and CEO Michael Gamzon says the REIT’s focus on logistics real estate in high growth, supply-constrained markets with multiple drivers of demand positions the company well to respond to changes in supply chain strategies.
INDUS recently elected REIT status and changed its name from Griffin Industrial Realty. Speaking on the REIT Report, Gamzon said the company chose to convert to a REIT in part because it “aligned with the business we’re in,” as well as allowing INDUS to seek out capital in order to be an active developer and acquirer of assets.
INDUS’ core markets are: Hartford, Connecticut; Lehigh Valley, Pennsylvania; Orlando; and Charlotte, North Carolina. Gamzon described Lehigh Valley as “one of the best performing markets in the country.”
Nareit’s 2020 Leader in the Light Awards highlighted a strong field of companies that have worked hard during the pandemic to put their tenants’ needs first, while also reducing their energy, water, and waste output, according to Cliff Majersik, senior advisor for policy and programs at the Institute for Market Transformation.
Majersik served as a judge for the 2020 Leader in the Light Awards. He noted that REITs have put a premium on making their buildings comfortable, productive, desirable, and above all—safe for their tenants.
The increased adoption of automation technology within logistics real estate will help ease the shift toward more resilient, just-in-case supply chains, according to Melinda McLaughlin, vice president and global head of research at Prologis, Inc. (NYSE: PLD).
Speaking on the REIT Report, McLaughlin said the shift in supply chain format will put an intense strain on the amount of available supply of property. “Automation can help customers adapt to that and incorporate that move to more resilient supply chains, without necessarily being limited by the amount of labor or logistics real estate out in the market,” she said.
McLaughlin noted that the level of automation adoption in logistics real estate is increasing but is lower than most people think. Only about 20% of warehouse facilities incorporate more advanced types of automation, and that’s highly concentrated toward e-commerce facilities due to their labor intensity, she said.
David O’Reilly, CEO of The Howard Hughes Corporation (NYSE: HHC), said the REIT has an “unparalleled opportunity” to continue to drive net asset value (NAV) growth over the next several years and decades.
O’Reilly was named CEO at the start of December, after serving in that position on an interim basis since September.
Speaking on the REIT Report, O’Reilly attributed the growth potential to increased demand for mixed-use live, work, play communities, coupled with over $1 billion of liquidity on the company’s balance sheet.
Recent news on commercial real estate valuations reflect growing confidence that the sector will start to recover in 2021, said Nareit Senior Economist Calvin Schnure.
Speaking Dec. 7 on the REIT Report, Schnure noted that valuations appear to be more stable than they appeared a few months ago, when the sales prices of properties that were being sold showed a big discount. Volumes at that time were light, though. “As we get a better look at the market, the valuations reflect a bit more confidence that the real estate markets will recover next year,” Schnure said.
Overall, Schnure noted that real estate is holding up quite well in the current environment, with rent collections recovering as businesses open up, “but obviously there are still strains.”
Turning to the broader economy, Schnure noted that while it appears to be slowing, “we’re not at risk of a stall.”
David Veal, chief investment officer for the City of Austin Employee’s Retirement System (COAERS), joined guest host Meredith Despins, Nareit senior vice president, investment affairs, for a special edition of the REIT Report to discuss how investing in a completion portfolio using REITs is delivering value to the pension system’s real estate investment portfolio.
Pension funds have long recognized the important role real estate plays in diversified investment portfolios. However, over the past 20 years, the real estate economy has expanded beyond the property sectors institutional investors have traditionally invested in—like retail, office, residential, or industrial. Today’s REIT industry reflects that evolution and offers investors access to a diversity of property types, including the new economy property sectors like infrastructure, cell towers, data centers, and networked logistics properties that house the growing digital economy. This rise of 21st century real estate has prompted institutional investors—such as COAERS—to adopt a portfolio completion strategy. A portfolio completion strategy is a tool investors have to invest in property sectors, including new economy sectors, that complement the traditional real estate property types in order to achieve more robust diversification, boost portfolio investment returns, and dampen volatility.
STORE Capital Corp. (NYSE: STOR) President and COO Mary Fedewa says that after six years as a public company, the net lease REIT has “barely scratched the surface” in terms of tapping potential opportunities for growth.
Speaking on the REIT Report, Fedewa said STORE continues to see trends “driving more net lease activity, as companies recognize the benefit of using their own capital to grow their business rather than to hold real estate.”
Fedewa said that with over 200,000 companies within its target market, STORE sees plenty of runway for growth. “Opportunity is so large that it allows us to be highly selective and to focus on investment opportunities that are accretive to our shareholders, regardless of market conditions,” she noted.
REIT share prices, buoyed by positive developments with regard to progress on a COVID-19 vaccine, ended last week at their highest levels since the start of the pandemic, according to Nareit Senior Economist Calvin Schnure.
Speaking Nov. 16 on the REIT Report, Schnure noted that news that Pfizer trials showed a success rate of 90% sent REITs sharply higher, especially for those sectors most impacted by the pandemic.
Lodging and resort REITs were up 31% on Nov. 9 alone, while retail REITs were up nearly 20%. REITs closed out the week at the highest Friday close since March 6.
The DLA Piper annual survey of real estate executives cites the availability of capital looking to invest in commercial real estate as a reason for optimism in the current environment.
Speaking on the REIT Report, John Sullivan, U.S. chair and global co-chair of DLA Piper’s real estate practice, said “the fact that there are folks out there with money to invest—and actually we’re seeing some increases now in investment—is a reason for some optimism.”
The survey showed 58% of respondents citing an abundance of available investment capital as the top reason for an optimistic economic outlook, an increase of 15 percentage points from the 2019 survey. Sullivan pointed to recent estimates of around $400 billion in available institutional capital looking to invest in commercial real estate.
Gaming REITs whose tenants are investing in online gaming (iGaming) platforms are expected to benefit from increased downside protection, according to Spenser Allaway, an analyst on Green Street’s research team and sector head of net lease, gaming, and self-storage.
Speaking on the REIT Report, Allaway said downside protection for the gaming REITs will be in the form of improved underlying tenant credit.
The three primary gaming REIT tenants are: Penn National Gaming, a tenant of Gaming and Leisure Properties, Inc. (Nasdaq: GLPI); Caesars Entertainment, the operator for VICI Properties Inc. (NYSE: VICI); and MGM Resorts, a key tenant of MGM Growth Properties LLC (NYSE: MGP).
“All of these tenants have made sizeable investments to establish an online presence,” Allaway said.
Third-quarter GDP posted the biggest increase in history as it rebounded from a record decline in the Spring, yet it still remains below levels seen a year earlier, indicating that further improvement is needed, said Nareit Senior Economist Calvin Schnure.
Speaking on the REIT Report, Schnure noted that even after the 33% increase, third quarter GDP is “still down by as much as you might see in a typical recession, so we still have a ways to go.”
As for which areas showed growth, Schnure pointed to spending on goods, particularly items that can be used at home. In fact, total durable goods spending is 12.7% higher than a year earlier, Schnure said.
Retail sales figures for September came in stronger than expected, laying the groundwork for a potentially robust holiday sales season this year, according to Nareit Senior Economist Calvin Schnure.
September retail sales jumped nearly 2%, which was stronger than expected. “The economy’s not as weak as some people may have feared a month or two ago,” Schnure said.
Nearly all categories of spending are running at about 5% above pre-pandemic levels, although a few notable exceptions include gasoline, restaurants, and clothing and accessories, Schnure said. The overall gains mean that “we could well see a surprisingly robust holiday sales season,” he noted.
Current volatility within the REIT market is creating the potential for opportunistic investment, particularly among well-capitalized companies with seasoned management teams, said Jay Olander, managing partner of Cornerstone Realty Advisors.
Olander has served in senior REIT management positions for over 25 years. Most recently, he oversaw the $1.9 billion sale in 2016 of Landmark Apartment Trust, Inc., an apartment REIT.
Speaking on the REIT Report, Olander compared current market conditions to those of previous cycles, concluding that “over time, we do expect that the investment market will return, just as we’ve seen in the past.”
A slowing of payroll employment in September raises concerns over the pace of the economic recovery in the months ahead, Nareit Senior Economist Calvin Schnure said.
Speaking Oct. 5 on the REIT Report, Schnure noted that despite the 661,000 rise in payroll employment in September, “the report had more warning signs than good news.”
The increase came in below market expectations, and while the unemployment rate dropped to 7.9%, a big part of that was because people stopped looking for jobs—especially women and minorities.
The biggest story to emerge from the past six months has been the bounce-back in certain retail sectors. Funari noted that rent collection for free standing retail started out at 73% and by September was almost at 95% of typical rent collected. Shopping centers started the pandemic at slightly over 50% and were at 82% of typical rent collection by September, she noted.
Nareit decided to end its regularly scheduled rent collection survey this month, Funari explained, because most property sectors had stabilized by July and the remaining sectors seemed to be heading in that direction through September.
Furthermore, rent collection is only one piece of REIT operations, Funari said. “It says a lot about tenant health, which was useful information, especially early in the pandemic, but as we’ve stabilized over time, we’re just not learning new information about the REITs themselves.”
The commercial real estate industry should use the current environment as a catalyst to future-proof assets for the changing ways in which they will be used over the coming decade, according to Nikki Greenberg, founder and CEO of Real Estate of the Future.
Speaking on the REIT Report, Greenberg noted that while the ways we live and work have rapidly changed, the spaces we occupy have not. “We really need to use this as an opportunity to become future ready as we look toward 2030,” she said.
“Across the board, all sectors do need to do better,” Greenberg said. She stressed the importance of “a different way of thinking” that looks at the full scope of challenges ahead. “You have to have people in the room who don’t think like you…the traditional way of working and owning and operating space, that’s not going to serve us in the short term and it’s not going to serve us very well in the longer term either,” she said.
Most of the current economic news is pointing to an ongoing recovery, including for commercial real estate fundamentals, according to Nareit Senior Economist Calvin Schnure.
Speaking Sept. 14th on the Nareit REIT Report, Schnure noted that August retail sales data, to be reported on Wednesday, are expected to show a 1% increase. “Most aspects of retail sales actually are above pre-pandemic levels,” he said.
At the same time, the Job Openings and Labor Turnover Survey (JOLTS) showed that job openings rose 10% in July and are getting close to the range they were in late last year, Schnure said. Layoffs, meanwhile, have been below pre-pandemic rates during May, June, and July.
Against a backdrop of overall positive economic momentum, the performance gap between property sectors is likely to expand during the second half of the year, according to Carly Tripp, chief investment officer for the Americas at Nuveen Real Estate.
Speaking on the REIT Report, Tripp also discussed how to ideally go about positioning a portfolio amidst the current level of uncertainty.
“It’s really important to be disciplined and patient during times of uncertainty in order to not sacrifice long-term results or short-term gains,” Tripp said.
August employment data released last week shows that the economic recovery remains on track, despite worries about a potential rebound in the coronavirus, according to Nareit Senior Economist Calvin Schnure.
Employers hired back more than a million workers last month, with total payroll employment rising by 1.4 million. This number did include temporary workers hired for the Census, Schnure pointed out, but private payrolls were also up 1 million. The unemployment rate also dropped more than expected, to 8.4%.
At the same time, total employment is 11.5 million below where it was in February, Schnure noted, and less than half of the February to April decline in employment has been reversed at this point.
The appeal of attractive urban gathering places has remained intact throughout the coronavirus crisis, despite reports of preferences shifting toward less dense, suburban locations, says Robin Zeigler, EVP and COO at Cedar Realty Trust, Inc. (NYSE: CDR).
“One of the things we’ve seen during this period is that people do still have a desire to gather and to be in certain types of environments. The desire to have outdoor dining, the desire to go to a bar is still evident…people want good urban gathering places,” Zeigler told the REIT Report.
Cedar Realty owns a portfolio of predominantly grocery-anchored shopping centers in high-density urban markets from Washington, D.C. to Boston.
Continued signs of resilience in the economy, even as the coronavirus remains active, point to a positive environment for commercial real estate going forward, according to Nareit Senior Economist Calvin Schnure.
Speaking Aug. 31 on the REIT Report, Schnure noted that new home sales in July rose to their highest level since 2006. Durable goods orders rose more than expected, and industrial production and business investment are on track to return to pre-pandemic levels, he added. Consumer spending also rose nearly 2% in July.
While COVID-19 has created short-term disruption and altered business and leisure routines, trends prevalent today may not necessarily remain in place for the longer term, according to Bernhard Krieg, managing director and portfolio manager on the real estate equities team for Brookfield’s Public Securities Group.
Krieg noted that a valuation shift between growth and value-oriented stocks was already evident before the pandemic and has diverged further since then. However, “to a certain degree these trends are not permanent, in our view,” he said.
“It’s easy sometimes to extrapolate the most recent trends and think they will not change materially…It’s our view that we are going to revert back to normal and investing globally gives us some important perspective on some of the markets where the pandemic has subsided,” Krieg said.
The economy continues to experience a high degree of uncertainty, but operating performance across the REIT industry indicates that there could be some upside potential in the year ahead, said Nareit Senior Economist Calvin Schnure.
On the economic front, positive figures for housing starts, existing home sales, and the homebuilders’ survey have been tempered by high jobless claims, soaring mortgage delinquencies, and a wave of bankruptcies.
“The bottom line right now is that the economy is struggling to get back on its feet. It’s making some progress, but it’s going to continue to struggle so long as the COVID-19 virus remains uncontained,” Schnure said.
After spending much of the second quarter in a defensive mode, VICI Properties Inc. (NYSE: VICI) is now actively looking for ways to opportunistically deploy capital, says CEO Ed Pitoniak.
Speaking on the Nareit REIT Report, Pitoniak said that once VICI began to receive signals that its assets, particularly those in regional markets, were going to reopen strongly following COVID-19 shutdowns, “we felt confident enough to go back on the offensive.”
In mid-June, VICI announced it had agreed to provide a $400 million mortgage loan secured by the Caesars Forum Convention Center in Las Vegas and had also agreed to acquire approximately 23 acres of undeveloped land parcels adjacent to the center of the Las Vegas Strip for approximately $103.5 million.
Retail sales data for July point to a resumption in consumer spending, providing a boost for the retail REIT sector that has been under pressure throughout the coronavirus crisis, according to Nareit Senior Economist Calvin Schnure.
Retail sales rose 1.2% in July. While the increase was slower than that seen in the previous two months, sales rose to a level that was higher than before the crisis. Schnure noted that this is the fastest in history that retail sales have ever fully reversed the decline that occurred during a recession.
“This is good news for the retail REITs in the months ahead, that we’re seeing the retail spending coming back,” he said.
Boston, San Diego, and San Francisco continue to attract the lion’s share of life science venture capital investment, but strong industry tailwinds are raising the prospects for a number of other markets across the nation, according to Audrey Symes, director of research for healthcare, life sciences, and advisory at JLL.
Speaking on the REIT Report, Symes noted that even before the coronavirus crisis, the life science sector was at a point where many years of research and development were starting to bear fruit, including less expensive and more accessible gene mapping and personalized medicine.
“Life science was on an upswing, regardless,” Symes said, with venture capital inflows into the sector reaching a peak. “The stimulation from Operation Warp Speed and biomedical advanced research and development authority from the federal government is just adding fuel to the fire,” she said.
Economic reports released in the past week were mostly positive, but with millions still unemployed and benefits expiring, the need for additional stimulus measures remains, according to Nareit Senior Economist Calvin Schnure.
Speaking Aug. 10 on the REIT Report, Schnure said economic data reported last week “helps dispel some of the fears that the recovery stalled last month” due to the continued spread of the coronavirus.
Schnure noted that the ISM survey on manufacturing rose to 54.2, stronger than expected and above the 50 mark that indicates a growing sector. Motor vehicle sales were at a 14.5 million unit pace last month, also above expectations. “Consumers are coming back as the economy reopens,” he said.
Executives from Duke Realty Corp. (NYSE: DRE), a leader in corporate responsibility matters, joined a special edition of the REIT Report on August 5 to share their observations and advice on initiating and growing a vibrant ESG strategy that is embraced at all levels of the company.
In conjunction with Nareit’s multimedia series ESG Exchange, Nareit Executive Vice President and General Counsel Cathy Barré spoke with Ann Dee, executive vice president and general counsel, and Megan Basore, vice president of corporate responsibility.
Dee played a key role in the evolution of the ESG function at Duke Realty, serving in 2015 as the executive liaison of a cross-functional group of leaders looking at how to move forward on ESG matters. This led to the creation of a cross-functional corporate responsibility council.
Declines in second quarter GDP were concentrated in a few front-line sectors, making it more likely that the economy can begin to recover by the second half of this year or the first half of 2021, according to Nareit Senior Economist Calvin Schnure.
Second quarter GDP data released last week showed an annualized decline of 32.9%, which was in line with expectations. Schnure noted that the decline was front-loaded, as shutdowns had the biggest impact in April. Since then, there has been a relatively robust rebound as the economy began reopening, although he warned that some slippage of gains could occur if COVID-19 puts the reopening on hold.
The total value and volume of real estate deals across all property sectors declined in the first half of the year compared to the previous six months, but activity is expected to recover by the fourth quarter, according to Tim Bodner, partner and U.S. real estate deals leader at PwC.
PwC recently released its mid-year review of real estate deal activity that showed almost a 50% decline in deal value and volume in the first half of 2020 compared with the second half of 2019.
While the declines occurred across the board, Bodner noted that on a six-month basis, logistics was the only sector that experienced a year-over-year increase. In the first half of 2020, about $42 billion of logistics activity occurred versus $34 billion in the first half of 2019, he noted.
The innovation trend that emerged in the office sector prior to the coronavirus is only going to accelerate as organizations adapt to changes in how workplaces operate in a post-pandemic environment, according to Julie Whelan, head of occupier research for the Americas at CBRE.
Whelan told the REIT Report July 24 that innovation will be accelerated in large part by the success of the remote work model during the crisis. “The office is now becoming just one place among a network of locations where work gets done, so of course the role of it is going to accordingly change,” she said.
Prior to COVID, organizations were moving to models that were less hierarchical, less routine- driven, and more project-driven—all of which requires collaboration, Whelan said. Going forward, the conflict between the need for collaboration and increased remote working will spur innovation in terms of the tools and technology that are used every day, and how physical workspaces tie the physical and digital together to drive seamless interaction, she noted.
The economy continued to rebound in June, according to housing market data released last week, although the outlook depends on the reopening continuing on its current path—an open question at this point, Nareit Senior Economist Calvin Schnure said.
Speaking July 27 on the Nareit REIT Report, Schnure highlighted the jump in new and existing June home sales, with new home sales actually higher than they were a year ago. He said this suggests that the underlying economic demand “is intact as long as it’s safe to go out and go about our business.” Although house prices were a bit soft, as indicated by the Case-Shiller index, on balance the data point to “a reasonably strong housing market as we’re coming out of the shutdown,” he noted.
Meanwhile, Schnure noted that jobless claims numbers out last week may have been misinterpreted as more negative than they actually were, as a result of confusion over seasonal factors. “This is really not sending a signal of growing weakness in the job market,” he said.
Economic data released last week show a lot of potential for rebound—as long as the reopening can continue to proceed, according to Nareit Senior Economist Calvin Schnure.
Speaking July 20 on the Nareit REIT Report podcast, Schnure highlighted the range of economic indicators for June that were reported, including industrial production, retail sales, and housing starts. Those numbers underscore the possibility of getting the economy back to where it was before the pandemic, but “only as long as the virus is under control,” he said. News that the virus is surging in parts of the United States is creating tension in the market and threatens a pause or partial reversal of economic gains.
Schnure also discussed the potential for another round of stimulus. While details remain unclear at this point, the expiration of extended unemployment benefits at the end of this month gives some pressure to meet that deadline, he noted.
Family renter households are likely to account for a growing share of the overall renter pool as the millennial generation begins to raise families and create homes of their own, says Christopher Ptomey, executive director of the Urban Land institute’s Terwilliger Center for Housing.
Families currently account for about a third of the overall renter pool, Ptomey told Nareit’s REIT Report, but that is likely to change. “The millennial generation is reaching a tipping point demographically,” he said. “With the size of the millennial generation, we really expect that family renter cohort being a larger and larger portion of the overall number.”
A rollback of state reopening plans across the United States is placing additional strain on REIT tenants, especially those in the retail real estate segment, according to Jim Sullivan, managing director and REIT analyst at BTIG.
On July 13, California announced a statewide closure of all indoor operations of dine-in restaurants, movie theaters, and family entertainment centers, among others. County indoor closures include fitness centers, hair salons and barbershops, and malls, if those counties have been on a county monitoring list for three consecutive days.
Speaking July 14 on the Nareit REIT Report, Sullivan said certain types of retail will be particularly hard hit by the reclosure orders.
“For retailers of apparel, footwear, and accessories, particularly if there’s a seasonal element, it’s going to be very, very difficult for the retailers in the malls to be open on an effective, efficient basis to generate levels of revenue comparable to pre-COVID levels,” Sullivan said.
REIT share prices edged lower last week, as both the broader economy and also the real estate sector continue to be buffeted by the opposing forces of economic reopening and the spread of the virus, according to Nareit Senior Economist Calvin Schnure.
Speaking July 13 on the Nareit REIT Report, Schnure said news of more rapid growth of new cases, especially across the Sunbelt, is leading to a reconsideration of the prospects of reopening right away or being able to do so fully, rather than in slow stages.
Those concerns were reflected in REIT performance last week, with the sector down on balance, with the exception of timber, infrastructure, and home financing mREITs.
LaSalle Investment Management Securities Global CEO Lisa Kaufman said REITs are attracting investor attention on the basis that they currently offer “very good value” relative to the private market, as well as on a historic basis relative to equities and bonds.
Speaking July 6 on the Nareit REIT Report podcast, Kaufman said REITs in the United States and globally have “dramatically repriced,” and are materially underperforming broader equities and private real estate, “so we do see very good value today.”
LaSalle has lowered its REIT net asset value (NAV) estimates about 15%, and even with that reduction “we see some big discounts on offer,” Kaufman said. This is not lost on investors, she said, particularly the more opportunistic ones who are “adding money to the sector or even launching new programs to take advantage of what they see, and what we would agree, is a really good entry point.”
Nareit Senior Economist Calvin Schnure said the June employment numbers released last week were a “welcome positive surprise” that shows commercial real estate is heading in the right direction.
Speaking July 6 on the REIT Report podcast, Schnure said the 4.8 million jobs reported for June exceeded expectations by a wide margin. The unemployment rate, meanwhile, fell more than anticipated, to 11.1%. While that is still a very high number, Schnure said, “this is a good down payment on the recovery that we’re going to need.”
Hiring last month was concentrated in the sectors that had the biggest job losses when the economy shut down, such as retail and hospitality, Schnure pointed out. Despite the jump in employment, many of these establishments will not be doing their pre-crisis level of business right away, he noted.
Nareit Senior Economist Calvin Schnure said the Federal Reserve’s latest bank stress test results point to a banking system that is well positioned to support the real estate economy under various recovery scenarios.
Speaking June 29 on the REIT Report podcast, Schnure said the stress tests showed that most banks remain well capitalized under either a V, U, or W-shaped recovery. A V-shape sees the economy recovering later this year or early 2021, a U-shape points to a more sluggish recovery, and a W-shape indicates a double-dip recession.
The Fed also suspended share buybacks and limited dividend payments, Schnure said, noting that share buybacks have accounted for about 70% of payments made to shareholders by large banks.
Nareit Senior Economist Calvin Schnure said REITs are facing a “mixed picture” as the forces of economic recovery are being tempered by uncertainty regarding the ongoing risks from COVID-19.
In the June 22 edition of the REIT Report, Schnure noted that the recent divergence between the course of the pandemic and the pace of economic activity strengthened over the past week. While REITs and the broader equity markets reacted positively to surprisingly strong May retail sales numbers, that optimism subsided later in the week on news of a surge in new COVID-19 cases and what that means for the prospects of economic reopening.
Gina Szymanski, portfolio manager and director at AEW Capital Management, an affiliate of Natixis Investment Managers, joined the latest edition of the Nareit REIT Report podcast.
Szymanski discussed some of the differences between the current COVID-19 crisis and the global financial crisis. She pointed to the size and pace of fiscal and monetary stimulus as “the biggest difference by far.”
“During the last crisis the Fed was still learning how to be creative. This time around they are very aware of the playbook," Szymanski said.
In the latest edition of the REIT Report, Nareit Senior Economist Calvin Schnure said investors will be watching this week to see if economic indicators point to an uptrend similar to what was seen in the recently-released May unemployment report.
May retail sales numbers released this week will show whether or not spending has bottomed, Schnure said. The Federal Reserve, meanwhile, will report industrial production this week, while housing starts will also be released.
“Over the next several days, we’ll get a lot better idea of whether the whole economy is starting to turn towards recovery the way we saw in the job market,” Schnure said.
In the latest edition of the Nareit REIT Report, Darin Buelow, global location strategy leader at Deloitte, looked at the specific challenges that financial institutions face in returning to the workplace after an extended absence resulting from COVID-19.
According to Deloitte, financial institutions account for more than 15% of total office leasing activity.
Buelow noted that many financial service firms are located in downtown high-rise environments where employees have to use public transportation and deal with elevator access. COVID-19 is hitting these companies “very profoundly,” he noted.
Nareit Senior Economist Calvin Schnure discussed some of the main themes from Nareit’s REITweek: Virtual Investor Conference and the May jobs report in the June 8 edition of the Nareit REIT Report podcast.
Schnure characterized the overall mood at REITweek as “cautiously optimistic.”
“Obviously we’re still in unchartered waters and there’s a lot of concern about unforeseen risks in the period ahead,” Schnure noted. While economic activity is beginning to resume, few expect it to be without glitches, he added.
At the same time, property sectors are seeing a wide range of impacts from the crisis. In the retail sector, for example, the reopening of the economy is expected to help rent collection but going forward many tenants are still going to have a low level of revenue, “so we’re not out of the woods yet on that front,” Schnure said.
The latest edition of the Nareit REIT Report podcast looked at employment trends in the commercial real estate industry with Marc Torrey, vice president and global sales director at SelectLeaders, a career resources platform for real estate professionals.
Torrey explained that the landscape for commercial real estate hiring heading into the coronavirus crisis reflected a typical trend seen in an election year: a slow down on the transaction hiring side and a pick-up on the operations and asset management side. “We were already seeing that, and it went into overdrive with the start of the coronavirus,” he said.
While commercial real estate hiring slowed down considerably in April, it picked back up in May, according to Torrey, especially for full-service real estate firms. “We have seen it coming back in May and I think we’re going to see a lot of hiring happening over the course of the next few months and even (for) years to come as a result of everything that’s transpired,” he said.
Nareit’s T-Tracker, a comprehensive summary of REIT earnings and operating performance, showed an overall picture of weak earnings in the first quarter, with about half of the 9% decline in funds from operations (FFO) reflecting the lodging and hotels sector.
Speaking May 26 on the Nareit REIT Report podcast, Nareit Senior Economist Calvin Schnure noted that regional malls also had a decline in earnings and most other property sectors had modest declines. Industrial REITs, meanwhile, had a 21.7% increase in FFO, and single family home REITs saw a 7% FFO increase.
Most of the first quarter predated the COVID-19 crisis. As a result, second quarter T-Tracker results are likely to be “quite a bit weaker,” Schnure said.
Commercial real estate firms are beginning to implement lessons learned from the COVID-19 pandemic and create targeted measures to emerge stronger in the medium-term, according to Jim Berry, U.S. real estate leader at Deloitte & Touche LLP.
Speaking on the Nareit REIT Report podcast, Berry noted that the industry has moved from an initial ‘respond’ phase into a ‘recover’ phase, with many commercial real estate executives now focused on issues such as preparing for re-entry to physical spaces and promoting employee and tenant wellbeing. Executives are also looking at what worked well in the early stages of the crisis and what needs to be improved upon, he said.
The latest retail sales data point to a continued role for brick and mortar retail once the coronavirus crisis passes, according to Nareit Senior Economist Calvin Schnure.
Speaking May 18 on the Nareit REIT Report podcast, Schnure noted that the more than 8% rise in non-store retail sales in April, which includes e-commerce, was unable to offset the overall decline of 16.4%.
“Online commerce is still no substitute for a lot of the shopping that people do. So, even after this crisis passes, this tells us there’s still a strong role for brick and mortar retail sales,” Schnure said.
Hudson Pacific Properties, Inc. (NYSE: HPP) is preparing to welcome tenants back into its buildings by implementing new standard operating procedures across its portfolio, touching on everything from enhanced cleaning to increased signage and physical distancing policies.
Speaking on the Nareit REIT Report podcast, Natalie Teear, vice president of sustainability and social impact at Hudson Pacific, said the REIT is rolling out a “four-C’s” approach that encompasses communication, confidence, convenience, and cooperation. Hudson Pacific is also launching a mobile app at all of its multi-tenant properties in order to share the most up to date information with tenants on a real-time basis.
The REIT industry’s focus on the needs and concerns of its tenants will become increasingly important as a result of the coronavirus crisis, according to Gil Menna, co-chair of the REITs and Real Estate M&A practice at Goodwin.
Speaking on the Nareit REIT Report podcast, Menna said one of the ways that REITs can be opportunistic in the current environment is by focusing on unique ways to deal with tenancy concerns that evolve from the pandemic.
“Trying to attract tenants back to [real estate] space, using the space in a way that’s novel and useful to tenants to addresses their needs and concerns—and helping them psychologically become productive again—will be an important part of the opportunity set available to REITs,” Menna said.
Nareit Senior Economist Calvin Schnure said that while the April jobs report was “clearly a shock to the economy,” the bulk of job losses were confined to a few sectors facing complete shutdowns.
In the May 11 edition of the REIT Report, Schnure noted that the April report showed a record decline in employment while the unemployment rate jumped to 14.7%, the highest level since the Great Depression. However, the data are “less alarming than we might have expected,“ Schnure said. He noted that 60% of the job losses were in sectors such as restaurants, doctors’ offices, and retail—which may be in a position to rehire at a later date.
The retail real estate sector is leading the way in terms of preparing for a post-COVID 19 return to more normal business operations, according to Nareit Senior Economist Calvin Schnure.
Speaking May 4 on the Nareit REIT Report, Schnure pointed to the various new safety measures that Simon Property Group, Inc. (NYSE: SPG) has implemented in order to reopen some of its malls.
“The retail sector and the shopping malls are not isolated, they’re just the first part of our economy that’s going to be dealing with a post-COVID world. They are pioneering the way so that people can interact safely together,” Schnure said.
A new small business loan program recently launched by Kite Realty Group Trust (NYSE: KRG) is trying to give its tenants a “bridge to the other side” during the current economic uncertainty, said Kite Realty chairman and CEO John Kite.
In the May 1 edition of the REIT Report, Kite said the company is “on the front lines of this thing as it relates to the small business community.” The KRG Small Business Loan program will provide up to $5 million in total assistance and allow Kite’s small business tenants to request a loan amount of up to three months of operating expenses.
Kite said the idea to assist the REIT’s tenants, who were having difficulty accessing the Paycheck Protection Plan, “gained steam very quickly inside the company.”
The reaction to the program so far has been positive. “We fully anticipate looking to lend out as much as we can in this program,” Kite said.
The REIT industry’s “heavy footprint” in non-traditional asset classes gives it a clear advantage as the world adapts to new ways of living in response to the coronavirus crisis, said Scott Crowe, Chief Investment Strategist at CenterSquare Investment Management.
Speaking April 30 on the Nareit REIT Report podcast, Crowe said the crisis “ushers in a whole new paradigm of what real estate really is,” especially the idea of core versus non-core real estate. “The reality is that the way we live our lives is going to evolve significantly,” he noted.
One of the advantages that the REIT industry has is its “heavy footprint” in non-traditional asset classes, such as data centers and towers, Crowe said. He noted that the industry has “a much higher proportion of winners than losers as it relates to what the post-COVID-19 real estate new normal may look like.”
While REIT share prices drifted lower in the past week, conditions appear to have settled somewhat compared to the large swings seen in the early weeks of the coronavirus crisis, said Nareit Senior Economist Calvin Schnure.
Speaking April 27 on the Nareit REIT Report podcast, Schnure pointed to single digit moves in the past two weeks. One possible reason for the more restrained movement is the approach of first quarter earnings, he noted: “There could be a lot of investors who are in a wait-and-see mode.”
Looking at real estate markets overall, Schnure highlighted the release of CoStar data showing demand weakened considerably across all major property types, despite social distancing going into effect only in the closing weeks of the quarter. Net growth of demand for office space was at its lowest level since 2010, and net demand for retail space fell due to store closures, the first decline since 2009.
Bill Bayless, CEO of American Campus Communities, Inc. (NYSE: ACC), said the REIT is helping its student residents weather coronavirus-related disruption by ensuring they have a home during the crisis, regardless of their ability to pay rent on a timely basis.
Speaking April 23 on the Nareit REIT Report, Bayless said the company’s Resident Hardship Program ensures students can complete their online education in an academically oriented environment without facing late fees, online payment fees, financially-related evictions, or any negative impact to their credit reports if they and their families are facing financial disruption.
To date, 2,787 residents have applied under the program out of more than 100,000 residents, Bayless said. In April, the company abated $1.6 million in rent and has already abated $400,000 in rent for May.
Bayless said American Campus is “very pleased and optimistic about the return to campus in the fall by students, even if classes are going to be held online.” To date, the REIT’s portfolio is about 76% preleased for the fall, and in the 30-day period after March 16, it had 5,000 students lease to return in the fall. Lease cancellations for the fall are actually slower than in prior years, he noted.
A Nareit survey of April rent collection across the REIT industry points to a strong performance by industrial, multifamily, and office REITs.
Nareit Executive Vice President for Research and Investor Outreach John Worth told the REIT Report April 22 that industrial REITs saw 99% of typical rents received in April. The survey was conducted between April 8-15.
Multifamily REITs collected 93.5% of typical April rents, while office REITs collected 89.3% of typical April rents. Worth noted that there had been uncertainty as to how office REITs would fare, but “the fact that nearly 90% of rents have been paid does reflect the strong credit quality of REIT tenants.”
Health care REITs collected 85.7% of typical April rents, while shopping centers collected 46.2%.
On the 50th annual Earth Day celebration, Nareit Senior Vice President for ESG Issues Fulya Kocak said the social aspect of ESG is likely to see greater focus as a result of the coronavirus crisis.
Speaking on the Nareit REIT Report podcast, Kocak said that while attention to social matters was already gaining a lot of interest before the crisis, “after we return to our new normal we are going to see more focus on health and wellness as well as flexibility and adaptation of the workforce to different ways of getting things done.”
Kocak also commented on the upcoming Nareit ESG annual report, which will highlight the increased reporting underway by REITs. “There has been good progress made on the transparency aspects of ESG,” she said.
Kimco Realty Corp. CEO Conor Flynn said the REIT’s large national retail tenants need to pay their rent so that financial assistance can get to where it is needed most—small shop retailers.
In an April 15 REIT Report interview, Flynn—who was recently diagnosed with COVID-19 and suffered mild symptoms—outlined the REIT’s efforts to help its ‘mom and pop’ tenants, including rent deferral and its new Tenant Assistance Program (TAP).
Flynn said TAP’s aim is to help its smaller tenants “bridge to the other side of this” by offering free legal services to help them navigate federal and statewide assistance programs. So far, over 1,700 tenants have taken advantage of TAP and Kimco continues to try and get more tenants to actively use it. “Time is not on the side of our small shop retailers,” he said.
After steep share price declines across the REIT industry in recent weeks, a more moderating pattern appears to have set in, according to Nareit senior economist Calvin Schnure.
In an April 13 REIT Report podcast interview, Schnure noted that REITs are down 13% to 15% this year, representing a significant discount. However, “the markets appear to have settled into a middle range. You’re no longer seeing the very sharp declines that we saw in March and they’re looking forward to the period when this virus is more under control and the economy can get back to work—commercial real estate included.”
Schnure noted that REITs made gains in the prior week, and outpaced the S&P 500, as the sector was boosted by Federal Reserve policy provisions to support real estate if tenants fail to make rent payments.
Schnure also commented that a range of factors are influencing investor sentiment, and those factors all reflect different time frames. For instance, public health news is determined by the measures taken several weeks ago to limit the spread of the coronavirus, while the unemployment news is more closely tied to what’s going on today in the economy. At the same time, policy measures by the Fed and proposals for further stimulus point to the future.
Ric Campo, chairman and CEO of Camden Property Trust (NYSE: CPT), said that while April rent collections have slowed somewhat in the past week, “generally we feel pretty good about where we are” in terms of residents’ ability and willingness to pay rent.
In an April 9 REIT Report interview, Campo discussed the REIT’s efforts to help its residents weather the crisis, including the establishment of a $5 million tenant relief grant. He explained that Camden wanted to help fill the gap between when a resident might have lost a job and the receipt of federal benefits.
“Business should focus on being a real partner in the community… it’s just the right thing to do to help people when times are tough,” Campo said. He noted that there was more demand for the grant than expected, with the entire $5 million amount allocated in about 16 minutes. Checks were sent out to residents within 24 hours of their grant applications being approved, he noted.
The lodging sector was one of the first industries to feel the economic brunt of the coronavirus crisis, and it will likely be one of the last to benefit from an eventual upturn, Pebblebrook Hotel Trust (NYSE: PEB) Chairman and CEO Jon Bortz said.
Speaking April 9 on the REIT Report podcast, Bortz said about half of the hotels across the industry have now closed completely, with millions of employees furloughed. “We think it’s going to be a very slow recovery,” he said.
By the end of March, operations at all but eight of Pebblebrook’s 54 hotels had been suspended and over 7,500 employees furloughed. Meanwhile, costs have been cut at the corporate level, with executives volunteering to either reduce or forego their compensation. Pebblebrook has cut back on capital projects and drawn down its line of credit completely. “We’re sitting on a little over $700 million that should allow us, with a fairly significant cash burn, to get through the better part of next year,” Bortz said.
Bortz, who is 2020 chair of the American Hotel and Lodging Association, also described some of the advocacy efforts the group has conducted.