Nareit's REIT Report Podcast

Anticipated interest rate increases of about one and a half percentage points by year-end will still create a “very favorable” environment for commercial real estate, says Nareit Senior Economist Calvin Schnure.Speaking on the Nareit REIT Report, Schnure noted that it is “appropriate” for the Federal Reserve to be raising interest rates at this point and removing the stimulus that was put in place early in the pandemic.Schnure noted that goods inflation has been at about 12% over the past year, while service price inflation has slowed somewhat. “This suggests that we're not having a long- term problem from wage pressures with inflation. I do expect inflation to slow down, mostly in the second half of this year,” he said.REITs, Schnure said, perform better than most other sectors during periods of moderate to high inflation because they represent a real asset that own properties whose values rise with prices and with leases that can respond to changing market conditions.

Transaction activity in the hotel sector this year is expected to be “incredibly strong,” with robust pricing continuing in the luxury resort segment and the start of a recovery in business transient and group demand, according to Kevin Davis, CEO of JLL Hotels & Hospitality, Americas.Speaking on the REIT Report, Davis noted that JLL has more than $12 billion in its U.S. hotel sales and financing pipeline for 2022, the highest level since 2015, which was already a record year from a transaction volume perspective. If JLL is a proxy for the market, “my expectation is that you'll see a lot of transactions this year.”Davis said anticipated gains for 2022 follow a particularly strong year for the industry in 2021. This was fueled by the large amount of capital that had aggregated on the sidelines to take advantage of potential distress in the sector—which never materialized—as well as pent-up consumer demand for travel.

Investing in the farmland sector offers stability, strong income, good total returns, and inflation hedge characteristics, among other benefits, according to Martin Davies, global head of Nuveen Natural Capital.Speaking on the REIT Report, Davies also noted that “one very compelling theme is not being correlated to the economic cycle. Through the COVID-19 pandemic we’ve seen no dip-off in farmland returns. As we’ve seen historically through other economic crises, such as the global financial crisis and the tech bubble, farmland returns stayed strong through that period.”Davies noted that while land values historically have been a function of what was actually produced, going forward there could be increased opportunities to monetize some of the additional benefits that exist, including water quality, biodiversity, and carbon sequestration.

The data center sector is playing a significant role in getting utilities to increase the use of renewables across the electricity grid and bring about the larger goal of a 90% carbon-free electricity system by 2030, according to Breana Wheeler, director of operations at BREEAM USA.Speaking on the REIT Report on Jan. 24, Wheeler noted that the focus on decarbonizing the grid is “really critical, because while reducing energy consumption is important, data centers specifically will always face significant challenges to either build enough renewables to cover total usage or build close enough to an abundant supply of renewable energy.”Wheeler also discussed how BREEAM’s relationship with the data center sector has developed over the years, whether the general perception of data center energy consumption fits the reality, and how the data center sector is having a positive knock-on effect in terms of making other industry sectors improve their sustainability performance.

Prologis, Inc . (NYSE: PLD) Global Head of Capital Deployment Dan Letter says ongoing efforts by companies to rebuild inventories to pre-pandemic levels, and a focus on resiliency rather than efficiency in the supply chain, will create multi-year tailwinds for the REIT.Speaking on the REIT Report, Letter noted that inventory to sales levels are 10% below where they stood pre-pandemic. “Our customers are just trying to get back to the pre-COVID levels, let alone build that new safety stock on top of that,” he said.Letter said he expects supply chain challenges will persist into 2023. Vacancy rates are at unprecedented lows and space in Prologis’ markets is effectively sold out, he added.Prologis continues to see broad based demand in markets around the globe, according to Letter. The REIT is planning to start over $5 billion in developments this year, and also expects to make about $1.5 billion in acquisitions. In addition, Prologis’ land portfolio will allow it to develop over $26 billion of new product.

With a footprint heavily weighted toward the Sunbelt, plus an expanding portfolio of necessity retail assets, Michael Weil, CEO of American Finance Trust, Inc. (Nasdaq: AFIN), says the REIT is well-positioned for 2022 and beyond.Speaking on the REIT Report podcast Jan. 12, Weil said the company’s proposed $1.3 billion acquisition of shopping center assets from subsidiaries of CIM Real Estate Finance Trust, Inc., combined with its upcoming rebranding to The Necessity Retail REIT Where America Shops, spells out its clear focus on a particularly active corner of the retail sector.Since the REIT’s listing on Nasdaq in 2018, it has focused on single tenant and multi-tenant retail, with the latter in the form of open-air shopping centers.“We think it's an incredibly viable, strong asset class and it creates a portfolio that has terrific underlying strength,” Weil said. Over the last four or five years, as the REIT has continued focusing on necessity retail, it has grown from about $3.4 billion of assets to a projected $5.1 billion.

The REIT industry is closing out 2021 in a position of strength, with ample financing available, brisk merger and acquisition activity, high and rising rents, and elevated asset levels, according to Evan Hudson, partner and real estate capital markets legal expert at Stroock.“The credit markets are incredibly active, they’re liquid, they’re deep,” Hudson said. He noted that in addition to common and preferred equity deals, largely through at-the-market (ATM) offerings, his firm is also seeing a high level of joint venture activity.Following a productive year for M&A deals in 2021, Hudson expects all property sectors to be active in 2022. “Even though we have price agreement (between buyer and seller) and the price is very high, a lot of deals are still happening.” He stressed that what is new in the current environment is the entrance of “colossal” non-traded REITs with hefty amounts of cash to deploy.

The economy will enter 2022 on a firm footing and should be able to withstand a variety of challenges that have emerged in recent months, providing a backdrop for continued solid REIT performance, says Nareit Senior Economist Calvin Schnure.Schnure noted that the economic mood has shifted over the last couple of months, reflecting the new Omicron COVID-19 variant, supply chain issues, price spikes, and labor shortages, among other issues.“Overall, though, the economy is quite sound. It has a lot of strength and should be able to handle these challenges pretty easily in the year ahead,” Schnure said, particularly since many of the current challenges are related to the pandemic and should ease as COVID cases come down.As for the hot topics of inflation and interest rates, Schnure pointed out that inflation is still very connected to short-term bottlenecks. “We’re going to see continued concern about inflation, which the Fed is going to be watching closely,” he said, with gradual increases in interest rates likely to begin around the middle of next year.

Total REIT M&A activity through the third quarter of 2021 has already surpassed levels seen in 2019 and 2020, boosted by price recovery, attractive financing, and renewed pressure from activist investors, says Blake Liggio, partner in the real estate industry group of global law firm Goodwin.“Pricing for deals has improved coming out of the pricing troughs that we saw in many sectors during the pandemic… over the last two years it has been more challenging for boards to justify a sale of the company,” Liggio said. The current pace of deal volume, supported by low interest rates and attractive financing, is likely to remain intact through the end of the year, he added.The industrial, self-storage, data centers, multifamily, and life science sectors continued to see M&A activity from the end of 2019 and largely throughout 2020, Liggio said. In 2021, other sectors such as retail and office, have regained activity or begun to think about entering into a transactional strategic review.

The hotel and lodging sector is showing a varied recovery, as it outperforms 2019 levels in some areas but struggles in others, according to Pebblebrook Hotel Trust (NYSE: PEB) Chairman, President, and CEO Jon Bortz.Speaking on Nareit’s REIT Report, Bortz noted that strength in the market has tended to be concentrated in resorts, particularly drive-to resorts, which are often achieving higher occupancy and rates than seen in 2019.The struggles, on the other hand, have mainly been in the urban environment, Bortz said. He noted that in San Francisco, Pebblebrook’s revenue is still down 80% from 2019 levels, while in Washington, D.C., revenue is down 70% over that same period.Bortz said signs of recovery in business travel are already evident, “but it’s a very slow recovery.” He said business transient travel appears to be about 40-50% back, while business group travel is about 30-40% back.