Nareit's REIT Report Podcast

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.”