Archive for June 2023
What the Heck is Happening to REITs?
I’ve long been a proponent of REITs as a component of a well-balanced portfolio, and our fund, ACCRE, is made up entirely of publicly traded REIT shares. Over the last 20 years (and you really have to take a long-term view in portfolio structures), the FTSE/NAREIT All-Equity REIT index has grown by 9.25%, compared to 9.85% for the Dow and 10.02 for the S&P-500 (all indices assume reinvestment of dividends).
However, over the past 5 years, we’ve had the very serious societal disruptions of COVID, the Russian invasion of Ukraine, and re-emerging inflation. Non-REIT stocks have proven surprisingly facile at riding these roiling markets, particularly on-line retailers (Amazon, WalMart), tech stocks, and companies that actually benefit from people staying home (Roku and Netflix immediately come to mind). Specifically, equity REITs enjoyed a total return of 6.2% over the past five years, compared with 11.45% for the S&P and 9.49% for the Dow.
Arguably, there have been some bright spots in the REIT universe over this period, including single-family rental REITs, and after the huge COVID melt-down, a nice rebound in the hospitality sector. Indeed, 2021 saw a huge return in the overall REIT index (39.88%) but was followed by a terrible negative 25.1% last year. Thus far in 2023, equity REIT total returns have been an anemic 2.05%, compared with 9.17% for the S&P year-to-date.
So, what gives? In no small part, REITs suffer from what they are, namely portfolios of income producing real estate. Some of that real estate has suffered from cyclical issues (hospitality, movie theaters) only to fight back to some semblance of normalcy. Other sectors (office, some types of retail) may be in a long-term systemic decline. Neighborhood strip shopping centers have actually done quite well, anchored by ‘necessary’ businesses such as grocery stores and pharmacies, and the industrial sector has done very well. Apartments did well for a while, but there are signs of over-building in that sector. Single family residential rental, which was a darling for a while, now suffers from astronomical costs and labor shortages.
Not surprisingly, the REIT IPO market has been dead this year, with exactly zero offerings year-to-date (through the end of April). Indeed, the last REIT IPO was back in 2021 However, there have been 10 secondary common offerings, raising almost $3 Billion, and 16 secondary debt offerings which raised almost $12 Billion. For comparison, there were 66 secondary common offerings in 2022 which raised over $20 Billion. Clearly, there continues to be some interest for ‘new money’ to come into the REIT universe.
As mentioned, industrial REITs continue to be the bright-spot in the REIT index, with 12 industrial REITs averaging a total return of 9.39% thus-far in 2023 (data as of the end of April). The biggest loser has been the office sector, down 18.08% so far in the year. Based on my conversations with some REIT analysts, the softest area seems to be in B-properties in the CBD.
Single family home residential posted negative numbers last year, but that sector has rebounded 12.69% thus-far this year. I would note that there are only two such publicly traded SFR REITs in the index, and the 2022 pull-back was a rebound from their huge — and probably unsustainable — 2021 gains. I’m glad to see this small sector gaining ground again.
Self-storage is back in positive territory, showing a 10.02% gain thus far in 2023.
All of this information comes from NAREIT’s monthly data publication, REIT Watch. If you’d like your own copy, click here or visit NAREIT’s web site for even more data.
Best wishes to you all, and as always, if you have any questions about real estate, please don’t hesitate to reach out.
John A. Kilpatrick, Ph.D., MAI
From a small northwestern observatory... 