REITs are at a troubling turn in the real estate cycle.
They still harvest this Sales CEO Debra Cafaro called the post-COVID “incredible demand boost” but they face a tsunami of risk factors including geopolitical unrest, soaring inflation and interest rate hikes which have already started to exert upward pressure on capitalization rates. Real estate is still liquid, but at what price? And could part of this capital seek other alternatives?
“REITs are creatures of the IRS code by charter, but we are also captive to our access to capital because we are dividend payers,” Cafaro noted.
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Growing uncertainty was a recurring theme last week at the annual REIT Symposium sponsored by New York University’s Schack Institute of Real Estate. FPI’s CEOs, advisors and top investors offered their overview of the public and real estate markets to a large audience comprised primarily of aspiring real estate executives enrolled in NYU Schack’s real estate programs. Here are some key points from the conference.
Bad time to refinance
Despite an increase of 25 basis points in March, interest rates remain historically low. But they won’t stay that way for long as the Fed is determined to keep raising interest rates until it can get inflation under control.
“The scariest chart in real estate is the long bond,” said David Roth, partner and head of Real Estate Private Equity, Management of Ares. “Today, our battle is: will our rents increase faster than the rates?”
Fortunately, REITs and other public companies are much less leveraged and have extended maturities, according to Cedrik Lachance, executive vice president and chief research officer for Green Street.
ESG is everything
Even before the SEC proposed to make carbon reporting and climate-related disclosures mandatory for US public companies two weeks ago, REITs had already raised environmental, social and governance issues.
“Ten or 15 years ago this was the last page of our investor book,” noted Kimco Realty Corp. CEO Conor Flynn. “Now it’s the first page.”
The SEC will, however, make sustainability more complicated for REITs since it requires companies to report not only Scope 1 emissions and Scope 2 emissions, but also Scope 3 emissions, which are the carbon emissions generated by tenants and suppliers and other emissions from the REITs themselves. does not control.
“It’s going to be expensive and a ton of work,” said Mary Hogan-Preusse, senior adviser at a real estate venture capital firm. fifth wall.
All sustainability efforts are expensive and require a level of expertise not typically found in a real estate organization. “It’s a growing field, and there’s a huge talent gap,” said Benjamin Schall, CEO and President of AvalonBay Communities.
Tips need a refresh
Beyond sustainability, another major ESG issue that is both a social issue and a governance concern is the need to increase diversity, equity and inclusion. Hogan-Pruess noted that she’s proud of the progress the industry has made in this area, but, she said, there’s a “ton of work” to be done to get more DEIs into the C-suite. .
Sherry Rexroad, Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of STORE Capitalsaid greater diversity on boards is essential because it brings new ideas and demands for management.
“Diverse boards want a diverse workforce, so refreshing REIT boards is critical,” she said.
Activism on the rise
Governance is a frequent target of activist campaigns, and REITs get their fair share because of their ownership composition.
“One-third of most REITs’ properties are passive,” Rexroad said. “That’s higher than the average you see in the S&P.”
Activist campaigns, panelists seemed to agree, are a healthy feature of the marketplace, though they are expensive and time-consuming and often produce results that would have happened anyway.
It’s important for REIT executives to reach out to passive investors so they can get to know the company before problems arise, Rexroad said. “The people who vote your actions vote your governance, not your company,” she noted.
Old Assets New
“New economy” REITs, such as gaming, cell towers and data centers, take up a larger share of index funds, but traditional REIT sectors still provide the consistency and revenue growth that look for the big clues.
According to Matthew Lustig, President of North America Investment Banking, Matthew Lustig, President of North America Investment Banking, is one sector that has proven particularly reliable. & responsible for real estate and accommodation at lazard.
“Even though it’s an old economy, it works,” Lustig said.
Better get tech
While traditional real estate maxims still apply, REITs are making the most of new technologies to streamline their investments and analytics and meet tenant demand.
Ron Havner, Chairman of the Board of public storage, PS business parks and Shurgard Europesaid the company’s online leasing has grown from 1% in 2020 to 50% today.
“People want to interact digitally,” Havner remarked. “They want to communicate when they want, how they want.”
Technology drives cities
As financial services companies increasingly find that their employees can work from anywhere, technology and life sciences companies are showing a voracious appetite for urban office space because cities are attracting young people. and that they are centers of education.
“Companies today only go to places where they can find talent,” said Related Cos. President Stephen Ross, who is trying to lead a “renaissance” in Detroit with the development of a $300 million research facility at the University of Michigan.
Even though financial services and other industries may have shifted permanently to hybrid working, it doesn’t hurt the demand for office space so much, as companies still want corporate headquarters and employees still want their own office when they come to the office, according to Boston Properties Chairman Owen Thomas: “Even though our buildings are less busy, our rental volume is pre-COVID.”
Go long on logistics and life sciences
Along with multi-family buildings, logistics and life science offices seem to be the “it” property types today in terms of demand and rental growth, and these property types account for 70% of black stoneof the real estate portfolio, according to Kenneth Caplan, the company’s global co-head of real estate.
“The life sciences office we love,” Caplan said. “…You can’t do your lab work from home.”
But that’s only 70% of Blackstone’s US, European and Asian real estate holdings. The remaining 30% includes hotels and retail businesses, and even shopping malls.
As for the growing uncertainty in capital markets, Caplan seemed less concerned than the other speakers. “More volatility can create opportunities,” he said.
Sam Zell, who helped launch the modern REIT in the early 1990s, offered his assessment of different types of properties. Despite unprecedented demand, the industry “can get a head start,” the president of Equity Group Investments. Multifamily is increasingly politicized. Class A offices are overbuilt because WeWork has distorted demand. Retail, on the other hand, offers an incredible opportunity for repurposing.
“The amount of obsolescence in retail is extraordinary,” Zell said. There are going to be great fortunes made by figuring out what to do with this space.
But today, only 30% of Equity Group Investments’ assets are in real estate. The company supports and adds “professionalism” to private non-real estate family businesses in exchange for majority stakes, Zell said. And they keep their money in the United States. “You don’t get paid to take the risk overseas,” he said.