Nareit's REIT Report Podcast

REITs have convincingly outperformed private equity real estate funds in head-to-head matchups over a 20-year sample period from the first quarter of 2000 to the fourth quarter of 2019,  according to Tom Arnold, a visiting scholar at the University of Florida’s Warrington College of Business.Speaking with the REIT Report, Arnold highlighted the results of new research, sponsored by Nareit, that he carried out with fellow academics David Ling and Andy Naranjo at the University of Florida.Arnold explained that one of the main takeaways from the research is that even with no risk adjustments, 53% of the time investors would have been better off in the REIT index during the period that the private equity real estate fund was investing. The mean out-performance was 165 basis points, or 1.65 percentage points, per year. With a conservative investment for relative risk, REITs outperformed nearly 70% of the time, and their outperformance grew from 165 basis points per year to almost 600 basis points per year.

REITs can help provide access to the new economy sectors—such as cell towers, data centers, and networked logistics properties—that complement the traditional real estate property types, according to Todd Kellenberger, client portfolio manager, real estate securities at Principal Real Estate Investors. Kellenberger noted that the idea of using REITs to gain access to these new economy sectors as part of a portfolio completion strategy has garnered increased attention from institutional investor clients recently. Kellenberger joined guest host Meredith Despins, Nareit’s senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss the role REITs can play in building a successful 21st century real estate investment portfolio.

As technological innovation results in more efficient supply chain distribution, changes are also occurring in traditional concepts of industrial real estate and where it should be located, says Steve Weikal, lecturer, researcher, and the CRE Tech lead in the MIT Real Estate Innovation Lab.“Certainly what the industry thinks of as industrial real estate, or warehouse distribution real estate, has changed and will continue to change,” Weikal said on the REIT Report podcast.“If we are able to use technology to provide distribution more efficiently, more effectively, and in smaller spaces, which is very often the case, can we now do that in structures and in buildings that we hadn't considered before?” Weikal said.The proliferation of specialized data has enabled the industry to determine “the kinds of buildings that we need, the shapes, the sizes, and especially where they need to be located in order to make the global distribution system more efficient,” Weikal noted.

A global pandemic, major climate events, and a focus on social change have combined to create “unprecedented” demand for talent to fill sustainability and ESG positions, says Shelly Fust, co-leader for Korn Ferry’s global Sustainability and ESG Solutions Center of Expertise.Speaking on the REIT Report, Fust described sustainability and ESG as “a very big tent,” requiring talent from all sectors and all levels to fill the demand being created by this accelerating market. “There's so much momentum underway in this space. I believe truly that anyone who has the passion and interest in this sector can find a very rewarding career,” she added.Fust noted that corporate sustainability roles were really just being created about 15 years ago and were relatively thinly staffed at the top corporate level.“Many of those first chief sustainability executives are now preparing to retire. And as we're having to then magnify these roles across just about every organization, we’re finding that there's significantly more demand than there is talent,” Fust said.

The recovery in the leisure travel sector continues, despite concerns over new COVID-19 variants, while a similar trend in the business travel segment is yet to emerge, according to Jim Sullivan, managing director and REIT analyst at BTIG.Speaking on the REIT Report, Sullivan said that as of mid-August, “we have not seen any material decline. Traffic volume is holding up pretty well in the face of the Delta variant concerns.”Sullivan said Transportation Security Administration (TSA) data point to a “pretty consistently high” level of comfort in traveling, particularly for the leisure traveler. Recovery in the business sector is going to occur later, however.One reason the leisure market is seeing strong demand is the new flexibility provided to travelers who are able to work remotely, Sullivan noted.

Conditions remain healthy for real estate investment, with inflation expected to be transitory and any increase in long-term interest rates likely to be modest, according to Carly Tripp, global chief investment officer and head of Nuveen Real Estate Investments.Speaking on the REIT Report, Tripp said that although inflation had been felt in terms of cost fluctuations for building materials, Nuveen’s view is that inflation is transitory. “Overall, we’re not concerned at this point and continue to see a recovery across the board with some of these supply/demand imbalances expected to rectify over the next two or three quarters.”Tripp noted that interest rates remain “extremely attractive,” despite expectations of rate rises for the past decade. While the Federal Reserve has indicated it has no plans to increase short term rates anytime soon, long term rates, which are dependent on the market, are not posing a problem either, she added.

Recent REIT M&A activity underscores the resiliency of the real estate sector and more transactions are likely this year as conditions remain favorable for continued deal-making, experts at Deloitte say.Lynn Kawaminami, partner at Deloitte Tax, and Nathan Florio, principal at Deloitte Transactions and Business Analytics, spoke to the REIT Report on July 20.“All the activity that we’ve seen this year has really underscored the resiliency of real estate…even the sectors that struggled last year are starting to come back,” Kawaminami said. “The fundamentals are good, and I think we’re ready to get back to normal.”

Reliance on mass transit is playing a key role in determining the pace at which office markets across the country re-populate, says Julie Whelan, head of occupier research for the Americas at CBRE.Speaking on the REIT Report, Whelan noted that Texas is currently experiencing probably the largest return to the office, despite vaccination rates in some parts of the state lagging the national average. Other markets, such as California and New York, have higher vaccination rates but are returning to the office more slowly because of mass transit dependance, she added.More focus needs to be placed on getting people comfortable on mass transit again and getting it back to normal schedules and routes. “It’s an essential piece of getting people back to work,” she said. Until that happens, “reduced ridership is really only going to sustain that reduced occupancy in buildings that we’re seeing.”Whelan said best estimates point to current office occupancy at only a third of what was considered normal pre-pandemic. That is expected to change in the fall, however, as “the leisure of summer is going to abate and we’re going to get back into that normal routine.”

Real estate deal activity is accelerating in sectors with strong macro tailwinds, along with increased confidence in the public markets toward valuations, according to Tim Bodner, partner and U.S. real estate deals leader at PwC.Speaking on the REIT Report, Bodner said property sectors including logistics, multifamily, and life science have all seen increased deal flow. Office assets located in technology-oriented cities have also seen increased activity, while the leisure and hospitality sectors have also experienced a rise in transactions.“There continues to be an incredible amount of capital on the sidelines” on both the debt and equity side, Bodner said. He also pointed to an “incredible amount” of capital being raised by public non-listed REITs, which topped $3 billion in May.

Fundamentals for U.S. REITs have moved beyond COVID-19 “very distinctly,” with market rent growth, occupancy gains, and cash flow rebound evident across a range of sectors within the industry, according to Cedrik Lachance, director of global REIT research at Green Street.Lachance, who assumes his new role as Green Street’s director of research on July 1st, spoke on the REIT Report.From a GDP perspective, 2021 is a “year of rebound,” Lachance said. He noted that manufactured homes and industrial real estate are two sectors that Green Street believes will have the best combination of market rent growth and occupancy gains over the next five years.From a cash flow perspective, a significant rebound is also occurring in sectors that were negatively affected during the pandemic, including senior housing and lodging, Lachance said. At the same time, he pointed to “very attractive sustainable growth” for the next few years in sectors such as apartments and student housing. A number of other sectors should experience net operating income (NOI) growth in the 4-5% range for the next couple of years, he said.Turning to M&A activity, Lachance noted that, particularly in the public markets, deals have tended to occur between companies with a disparity in the cost of capital. Those deals “make a ton of sense,” he said. Going forward, M&A activity is most likely to occur between companies that have notable similarities but a relative difference in their cost of capital, he noted.As for the future of office, Lachance said that Green Street views work from home “as really the defining story of the real estate world in the pandemic,” and one where the influence extends to a range of other real estate sectors including residential, hotels, and suburban shopping centers. Lachance said the lack of clarity into the future of the office sector will likely last for another 12 months, but “when it’s all said and done, you’ll have about a 15% drop in office demand.”Lachance also commented on trends in European real estate, including the growth of non-traditional sectors. As for broader trends, he noted that Green Street firmly believes that public markets will remain an area of growth for REITs. Lachance also commented on the inflation hedge benefits of real estate.