After struggling a tough 2022, with whole returns on the FTSE All Fairness REIT Index down practically 25 p.c, publicly-traded REITs are poised for a bounce again in 2023 and issues bought off to a powerful begin with whole returns rising 10.07 p.c in January.
Most property sorts posted double-digit features for the month, led by lodging/resorts (up 17.13 p.c), industrial (up 13.71 p.c) and knowledge facilities (up 13.21 p.c). Even the much-maligned workplace sector noticed whole returns up 11.35 p.c in January.
WMRE spoke with Edward F. Pierzak, Nareit senior vp of analysis, and John Value, Nareit, govt vp for analysis and investor outreach, to debate the outcomes from the primary month of 2023.
This interview has been edited for model, size and readability.
WMRE: Let’s begin with the general view. It seems prefer it was a really robust month for REITs. Are you able to break down the outcomes a bit?
Ed Pierzak: The all-equity index up over 10 p.c is the most effective month-to-month efficiency since 2019. In the event you look throughout the property sorts, resorts had been the most effective performer, adopted by industrial and knowledge facilities. For resorts, the information was optimistic. Individuals are touring. And maybe there’s extra of a glimmer of optimism in 2023 on industrial and knowledge facilities. The fashionable economic system sectors are displaying power.
One of many attention-grabbing parts is when you check out the workplace sector. Its efficiency for the month was better than the mixture index. That’s notable for just a few causes. In the event you look again to 2022, workplace was the poorest performer. That might not be shocking. There’s a pure experiment happening the place roles of hybrid work and work-from-home are being fleshed out and that’s going to find out the way forward for workplaces. The outcomes reinforce the sentiment that workplaces are nonetheless vital.
You additionally had Ken Griffin, the top of Citadel, which introduced in a historic return of $16 billion in 2022. When requested what parts drove that, he credited that to staff returning full time to the workplace.
As well as, when you take a look at the newest Kastle knowledge for workplace occupancy ranges, the 10-city common has damaged 50 p.c. There’s a been a ahead development. There may be in all probability nonetheless fairly a methods to go. Labor Day appeared to be a little bit of a litmus take a look at on a push again to workplace. In the event you dial again to then, the occupancy was just below 44 p.c. Two weeks after that we noticed a bump to 48 p.c and ahead development since then to 50 p.c.
WMRE: Do you attribute any of the outcomes as a response to macro situations or expectations about the place financial coverage goes?
Ed Pierzak: When it comes to the broader financial outlook, Bloomberg’s most up-to-date month-to-month survey of economists put [the chance of a recession] at about 70 p.c over the subsequent 12 months. So clearly there stays some uncertainty. In the meantime, the Fed simply bumped up charges by 25 foundation factors. There’s recognition that inflation has eased. It’s nonetheless elevated general, however the means of decline has began.
However this underscores what we have now present in our analysis that REITs have carried out fairly properly in recessionary durations. Once we take a look at operations, issues are nonetheless in nice form. It’s a bit of early into earnings season, however at this level we’re seeing that power in operational efficiency is probably going sturdy.
WMRE: Are you able to deal with the hole between private and non-private actual property markets?
Ed Pierzak: There’s a divergence in REIT valuations versus REIT efficiency. And there’s additionally a divergence in cap charges and whole returns between the private and non-private markets. Knowledge reveals that as of the tip the third quarter, the unfold between the NAREIT index implied cap fee and NCREIF transaction cap fee was about 120 foundation factors.
If all else is equal, if personal markets modify to public markets, we’d see a decline of 20 p.c or extra on the personal facet. We’d anticipate over 2023 that this hole will shut.
Once we take a look at rolling four-quarter whole returns for the FTSE Nareit All-Fairness index and NCREIF-ODCE, as of the third quarter of 2022, the delta was over 38 p.c. That’s displaying REITs had been actually underperforming personal markets. In reality, it was probably the most important underperformance within the historical past of these indexes. Within the fourth quarter, the delta had dropped to 32 p.c. That was due each to a optimistic efficiency within the public sector and a damaging efficiency within the personal sector. The ODCE posted a decline of 5 p.c, the best because the nice monetary disaster.
As we check out that, the adjustment course of has began and we anticipate that this may unfold via 2023.
WMRE: Are you able to discuss a bit about any latest conversations you’ve had with portfolio managers? I’ve seen a variety of bullishness out there for REITs in 2023.
John Value: Ed and I not too long ago did a tour of some massive institutional buyers. We bought to listen to a bunch of various views on this public/personal valuation hole query in addition to completely different approaches they’re taking in addressing that valuation hole.
The primary one was taking a look at REITs as a tactical play. The investor is viewing the valuation dislocation as a possibility and making an attempt to maneuver money and property into REITs, as a result of they view the divergence with personal actual property as a short-term phenomenon. They need to create some alpha by positioning themselves there.
Different buyers are utilizing REITs extra strategically, actually executing on the thought of a “completion portfolio.” They’ve modified the form of their actual property allocations and utilizing REITs as a part of actual property portfolio to get entry to completely different property sorts.
And a 3rd strategy is utilizing REITs as the actual property sleeve of their portfolios. It’s not essentially tilted towards completion. It’s nearly increase their actual property allocation.
Throughout the board, the notion was that with the place valuations are, it gives an entry level for REITs. So it was actually a optimistic set of conversations.
WMRE: I not too long ago noticed Nareit additionally publish its capital markets replace summarizing 2022 exercise and it appeared like choices dropped down a bit within the latter half of the yr.
John Value: The latter half of final yr was quiet. REITs solely raised $2.5 billion from secondary fairness and debt choices, though in addition they raised $5.8 billion via at-the-market packages. Taken altogether, the final time REITs raised much less capital in 1 / 4 was 2009.… The info takes you again in time. We’ve seen very sluggish capital market issuance. Nevertheless it’s vital to attract the distinction between these two time durations.
In 2009, we had been in a monetary market disaster. Immediately, due to steadiness sheet power, REITs are well-positioned to navigate a interval of upper rates of interest. The sluggish fairness issuance and sluggish debt issuance is as a result of they don’t seem to be being pressured to subject. We’ll proceed to see extra debt issuance as refinancings come up. However as a result of REITs have a weighted 7.5 years to maturity on their debt, it will likely be sluggish and regular course of moderately than them dashing into market regardless of what charges and spreads look lie.
The shortage of exercise is an indication of the power of the steadiness sheets and their flexibility versus a danger attribute. We predict it’s an attention-grabbing phenomenon. We’ll see extra issuance in 2023. However it’s reflective of all of the preparation REITs did to make their steadiness sheets extra resilient.