Nareit's REIT Report Podcast

The latest edition of the Nareit REIT Report podcast looks at developments surrounding opportunity zone investing with Dan King, senior manager, national tax services, at CohnReznick LLP.Opportunity zones were created by the Tax Cut & Jobs Act of 2017, and final regulations were released by the Treasury Department and the IRS at the end of December 2019.“The final regulations have answered a lot of the uncertainties in the market,” King observed, and include “a lot of taxpayer-friendly aspects.”While there are still some aspects that need to be clarified, overall the final regulation package has been “very well received by the industry,” which has resulted in CohnReznick “getting a lot more questions coming in, and a lot more people interested in doing deals,” King said.In terms of the types of investors being drawn to opportunity zones, King pointed to interest from family offices, real estate developers, and closely-held businesses.

Nareit’s vice president for research, Nicole Funari, joined the latest edition of the REIT Report podcast to discuss some of the findings from Nareit’s latest REITs Across America data, including the contribution that REITs make to the U.S. economy, their geographic footprint, and their shareholder base.Funari noted that the number of REIT properties has increased every year since Nareit began counting in 2016. The latest data shows over 520,000 REIT properties, comprised of 207,000 actual buildings, 219,000 signs or billboards, and 95,000 cellphone towers.Traditional REITs still have the highest level of gross asset value, according to Funari, but some of the newer sectors like data centers have shown the most growth over the past three years. Lodging has also shown large growth in gross asset value, as has retail, which has posted the second highest growth rate over the past three years. While the value of traditional mall and shopping center assets are down, there has been an uptick in the gross asset value of single tenant retail and restaurants, Funari explained.

While the growth in the supply of short-term rental (STR) units has tempered in recent years, the STR market is an important factor in valuation calculations for the traditional lodging sector, according to Jamie Lane, senior managing economist of CBRE Americas Hotels Research.Speaking on the Nareit REIT Report podcast, Lane noted that with a bigger inventory of STR units now in place, year-over-year percentage growth rates for STR supply in the U.S. will continue to ease. STR unit supply grew by 26% in 2019, down from 39% in 2018, and down from the seven years of exponential growth prior to that. The rate of supply growth is expected to slow in 2020 to 19%.Despite the slower growth rate, new units have still averaged over 100,000 per year since 2016, with 2020 marking the fifth consecutive year that this threshold has been met. As a result, the supply penetration rate of STR units to traditional hotel units reached almost 10.5% in 2019 and is expected to hit 12.2% in 2020, Lane said.In 2014, the vast majority of STR units were coming online in urban areas. Lane notes that since then, most of the growth has primarily occurred in rural and suburban areas. Urban units dropped to 21% of the total STR supply in 2019 from 46% in 2014.

The latest edition of the Nareit REIT Report podcast looked at real estate deal activity with Tim Bodner, U.S. real estate deals leader at PwC.Although the volume and value of commercial real estate deals in 2019 were lower relative to 2018—a particularly strong year—activity was higher than in 2017. Most of the decline in 2019 came from the lodging and retail real estate sectors. In retail real estate, transaction value was down 31%, while falling 15.5% in the lodging space. On the other hand, the value of logistics transactions rose 13% in 2019. Nearly all other real estate sectors logged a decline in transaction value in 2019, according to PwC.In 2019, nine REIT M&As took place, representing about $24 billion in value. About 70% of that total represented the logistics sector.Fundraising by public REITs from January through November 2019 hit $107.3 billion, or nearly twice the total for all of 2018 and 7% higher than the previous peak in 2017.

After underperforming in 2019, the lodging and resort REIT sector is on a similar track in the first few weeks of 2020, according to Evercore ISI managing director Rich Hightower.In the latest edition of the Nareit REIT Report podcast, Hightower said he expects no more than a 1-2% increase in room night demand in 2020. Supply, meanwhile, is increasing at a 2-2 ½% range, and more so in some of the urban markets.“It seems to be hard to argue for ADR (average daily rate) improvements in a declining occupancy scenario,” Hightower said. He noted that the industry didn’t see much pricing power at all in 2019, and that was at a time when occupancies were still growing. Consequently, RevPAR is likely to be flat to lower in 2020, according to Hightower.Meanwhile, Hightower noted that TRevPAR (total revenue per available room) became a mainstream statistic that companies started to report in 2019. It captures non-room revenue and is growing at a rate in excess of RevPAR, he said.

In the latest edition of the Nareit REIT Report podcast, Calvin Schnure, Nareit senior vice president for research and economic analysis, shared his thoughts on the economy, real estate, and REITs in 2020.In Nareit’s 2020 Economic Outlook, Schnure uses the term “uncharted waters” to describe the current environment. He explained that the phrase underlines the fact that the risks normally faced this far into a typical expansion or commercial real estate boom aren’t present at this time.“We know there are risks ahead, we just can’t look to the usual corners to see where they are going to be,” Schnure said. He added that because there is no clear idea of when the current expansion might end, the descriptor “late cycle” doesn’t really apply. A more accurate term for the state of the commercial real estate market is that of a “mature recovery,” he noted.

The latest edition of the Nareit REIT Report podcast looked at trends in the REIT health care real estate segment with Michael Gorman, a managing director and REIT analyst at BTIG.The key theme last year was the differentiation in the underlying performance of health care real estate portfolios, according to Gorman. That trend is likely to remain in place, at least in the first half of 2020, he noted.In 2020, “we don’t see a groundswell of improvement in any of the particular property types. Senior housing is still going to be pretty choppy at the national level,” Gorman said. However, the medical office building segment should return to external growth in a “more meaningful way” in 2020, he added.One key factor adding to uncertainty in the health care real estate sector this year is November’s general election, according to Gorman.

While retail real estate faced challenges in 2019, performance varied quite widely across the sector, a trend that is likely to continue into 2020, according to Mizuho Americas REITs analyst Haendel St. Juste.St. Juste was a recent guest on Nareit’s REIT Report podcast. He highlighted the disparity in performance between regional malls, which faced challenges, and shopping centers, that have had a “formidable run.”In terms of the regional malls, “there’s lots of uncertainty with key tenants heading into 2020,” he said, while also describing Simon Property Group (NYSE: SPG) as “the most investable company in that space.”For those investors looking for retail exposure, St. Juste highlights the triple net lease segment, which he feels offers “the best risk-adjusted returns.”

Jonathan Keehner and John Roe, partners at strategic communications and investor relations firm Joele Frank, were guests on the latest edition of the Nareit REIT Report podcast.Nareit has worked with Joele Frank to create a Communications Toolkit with a framework for developing an effective communications strategy for generalist investors. It was recently distributed to Nareit members.Keehner described what he sees as a “real disparity between the dedicated investor group and the generalist group.” To help alleviate that gap, he suggests REITs “hit the reset button” and really focus on communicating what makes their company unique.“It’s about introducing the story and making it compelling, it’s about leveraging the exciting aspects of a portfolio to draw in a new audience,” Keehner said. At the same time, he recommends that REITs take a fresh look at their IR exposure: “It’s [about] doubling down on the existing investor base and then thinking creatively about ways to engage with a new investor base.”

Frank Haggerty, Jr., portfolio manager for all dedicated global real estate securities managed by Duff & Phelps Investment Management, joined Nareit’s REIT Report podcast during REITworld 2019 in Los Angeles.Haggerty highlighted some of the geographic regions that are expected to perform well in 2020. In the United States, he said, Duff & Phelps is most positive on Southeastern markets. The region is seeing the technology job growth that is evident in other parts of the country, he noted, combined with a strong corporate relocation tailwind as companies seek lower-cost and more business-friendly environments.As for Europe, Dublin, Madrid, and Barcelona are all markets that are showing potential, he said.In terms of U.S. REIT fundamentals, Haggerty said Duff & Phelps is watching supply: “Clearly given where we’re at in the real estate economic cycle, supply is an issue in a number of property types,” he said. Growth in jobs and wages are also being closely watched, he added.Meanwhile, Haggerty said he expects to see a continuation of selective, strategic M&A between public companies next year. IPO activity is likely to also to be limited. “We will see a handful of property deals coming out, particularly if valuations stay at their current level,” he said.