Nareit's REIT Report Podcast

Investors looking to allocate to real estate today should consider the listed market first, with REITs in particular priced to deliver annual returns in the high single digit range for the next several years, says Lisa Kaufman, head of global securities at LaSalle.“We see public real estate as unequivocally more attractive than private real estate today,” Kaufman told Nareit’s REIT Report podcast.Kaufman said the REIT market has been “really very rational” through the recent period of tightening financial conditions, “and financial conditions do remain in the driver's seat.” She noted that REIT returns “are attractive and we have a higher level of conviction in our outlook today just given the material tightening of financial conditions and the repricing that's already occurred in the REIT sector.”REITs are underrepresented today in institutional real estate portfolios, Kaufman said. Listed real estate represents around 45% of institutional quality real estate worldwide, but only about 20% of investors’ real estate allocation. REITs have the additional benefit of being disproportionately weighted toward non-traditional property types like self-storage, health care, and data centers, she said.

REITs provide protection against high and moderate inflation across a range of property types, says Nareit Vice President of Research Nicole Funari.Speaking on Nareit’s REIT Report podcast, Funari noted that, in terms of how REITs respond to inflation pressures, “people are inclined to believe that there might be differences among the property sectors, but the data doesn't bear that out.”

The potential for rolling country-level recessions and the impact of higher interest rates on transactions and capital flows are among the main themes influencing global real estate investment in 2023. The result, according to Citi’s global real estate research team, are opportunities mixed in with the broader uncertainty facing investors.“I think there's a lot more uncertainty entering 2023 than we've seen at least in the past few years, putting aside COVID. I think that's going to be the biggest challenge and opportunity depending on how that turns out,” Nick Joseph, Citi’s global head of real estate and head of the U.S. real estate and lodging research team, told Nareit’s REIT Report podcast.Global sector-specific trends that Citi is monitoring include: the future of the office; e-commerce and the impact on brick and mortar; lodging demand and recovery; health care coming out of the pandemic; housing trends; and digital transformation and its impact on infrastructure.

The REIT industry is undertaking “critical” work to ensure that real estate’s leadership, staff, and procurement opportunities better reflect the nation’s wider demographics, says Ayris T. Scales, Nareit’s senior vice president for social responsibility and global initiatives.Speaking on Nareit’s REIT Report, Scales said that Nareit is working together with its REIT members to accelerate change collectively and “elevate the way that we do things on behalf of the industry.”Scales outlined two key projects underway at Nareit to advance diversity and inclusion throughout the industry.She noted that the grant application process for the Nareit Foundation’s Dividends through Diversity, Equity, and Inclusion (DDEI) Giving Campaign opened this week.Among the groups urged to apply, Scales said, are organizations focusing on ways to help secure talent for the real estate industry by looking at ways to expose high school or college students to real estate opportunities through mentorship, internships, and any other types of leadership and professional development opportunities.

REITs have historically made solid returns following the onset of a recession, particularly in the early stages of the cycle, making this an ideal time for investors to begin building an exposure to the asset class, says Rich Hill, head of real estate strategy and research at Cohen & Steers.Speaking on the Nareit REIT Report, Hill said REITs have historically produced average 12-month forward returns of more than 10% following the onset of a recession, with early-cycle returns exceeding 20%.

A recovery in the real estate capital markets is likely to begin around the middle of the year, with transaction activity becoming better supported over the course of 2023 as financial stresses start to ease, says Richard Barkham, CBRE’s global chief economist.Speaking on the Nareit REIT Report podcast, Barkham said, “real estate capital markets tend to lead the economy, both on the downside and in the upturn…it’s going to take a while for investors to start to move because they want to assess the situation in terms of fundamentals. But we do see a capital markets recovery beginning around mid-year.”Barkham said transaction activity is likely to become better supported over the course of the year as financial conditions improve, primarily in the second half of the year. However, “that's not to say there won't be activity in the first half of the year. There is a record amount of capital looking to deploy in real estate and looking for opportunities, particularly if pricing is a little bit more favorable.”

Centers for Leadership Excellence (CLE), a new initiative from the Ferguson Charitable Foundation, seeks to introduce ethnically diverse college students to career opportunities available in real estate, with the long-term goal of helping to change the racial and ethnic composition of the sector.“We want to get these students into the boardroom and into the c-suite because as leaders they can effectuate change,” Bill Ferguson, chairman of Ferguson Partners and president of the Ferguson Charitable Foundation, told the Nareit REIT Report.Ebony Mitchell, director of strategic initiatives at Ferguson and student liaison for CLE, noted that with the lack of ethnic diversity in commercial real estate, “there's been a limited number of role models and mentors of color to attract young collegiate talent on and off campus.” She added that many of Ferguson’s clients have also struggled with attracting diverse talent, especially at the entry level due to traditional campus recruiting efforts.Ferguson explained that students selected into the CLE Program are required to take a certain number of courses in real estate in order to graduate with a minor in real estate. Given Ferguson’s vast network of corporate relationships across 12 sectors in the real estate industry, “we are connecting them with clear opportunities,” he said.

REITs have demonstrated resilient operational performance and are well prepared for the continued economic uncertainty, higher interest rates, and elevated inflation expected in the coming year, says Ed Pierzak, Nareit’s senior vice president for research.Speaking on the Nareit REIT Report, Pierzak noted that REITs are not only performing well but are keeping pace with inflation. Meanwhile, balance sheets are in “great shape,” with leverage ratios near historical lows.With the risk of recession a dominant theme for 2023, Pierzak pointed out that “a recession does not have to equate to negative property total returns.”A Nareit analysis of the last six U.S recessions shows that on average, REIT's underperformed private real estate in the four quarters before a recession. However, REIT's outperformed private real estate both during a recession and in the four quarters after. A comparison of the FTSE Nareit All Equity Index to the Russell 1000 Index found that it outperformed broader equities before, during, and after recessions.

Decarbonizing buildings is crucial for achieving net zero emissions goals. Retrofitting existing buildings is necessary as 80% of office buildings will still be standing in 2050. Current retrofitting rates must triple or quadruple to meet targets. The podcast discusses the environmental case for retrofitting and the challenges it brings. It also explores different levels of retrofitting and the costs, challenges, and opportunities associated with it.

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.