Nareit's Reit Report Podcast

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. 

The real estate industry needs to collaborate and embrace technology as it works to reduce carbon emissions or else face having external mandates forced upon it, says Peter Gajdoš, a partner at venture capital firm Fifth Wall.Speaking on the Nareit REIT Report, Gajdoš, who co-leads Fifth Wall’s climate technology investment team, noted that although tackling carbon emissions will take decades, the real estate industry should see it not as a threat but as an opportunity to cooperate. “Let’s work together, let’s find solutions because otherwise I believe the sector will be mandated to fix the carbon problem and I’d rather see the sector proactively working on this and finding solutions ourselves rather than a top-down approach from the government,” Gajdoš said.

Increased customer demand for logistics labor, combined with rising worker expectations around training and career opportunities, has led Prologis, Inc. (NYSE: PLD) to expand its logistics training program to six major logistics hubs, with plans to add programs in nine additional national markets by the end of 2021.Speaking on Nareit’s REIT Report, Steven Hussain, vice president of workforce programs and community relations at Prologis, explained that the REIT’s Community Workforce Initiative (CWI) training program launched in 2018 in response to conversations with Prologis’ largest customers that identified labor and talent as their number one pain point. At the same time, Prologis’ community partners were looking for “on ramps” to well-paid jobs for individuals they served.Since then, the labor market has become even more challenging, Hussain explained. “It’s incredibly competitive and incredibly challenging to recruit right now and worker concerns around COVID-19 persist and safety is top of mind. At the s

Farmland real estate is one of the nation’s largest commercial real estate sectors and its low risk and volatility profile makes it a “great hedge” within a balanced portfolio, says Pierre Rigaud, vice president, advisory and consulting, at Green Street.Speaking on the REIT Report, Rigaud noted that the farmland real estate sector is valued at $2-3 trillion. Institutional ownership in the sector is only about 1%, compared with 5-15% in most other real estate sectors. The two key crops in the sector are row crops and permanent crops, with row crops having a lower risk profile than permanent crops.Rigaud said farmland real estate and how it compares to other asset classes is not well understood by investors at this time. Some of the key attributes of farmland real estate include its lower obsolescence risk, lower fungibility risk, and lower capex burden.Population growth has outpaced the supply of arable land, Rigaud noted, resulting in land appreciation. As a result, “U.S. farmland has had a very strong track

The landscape for real estate fundamentals looks “very favorable” going forward, supported by GDP and employment growth, according to Lowell Bolken, portfolio manager of the Securian AM Real Asset Income Fund and Real Estate Securities Fund.“We think employment will be strong as job openings are still above the actual unemployed population right now,” Bolken told Nareit’s REIT Report.He noted that in terms of REIT valuations, it’s a mixed picture. However, “we're very confident where the economy is going in terms of real estate and other sectors…growth is still in the offing.”Bolken, meanwhile, noted that while inflation might not last longer term, “it's less than transitory.” As a result, Securian is positioning itself for short term inflation by focusing on assets with shorter term leases such as apartments, self-storage, and hotels, while de-emphasizing the net lease sector.

Jonathan Morris, adjunct professor in Georgetown University’s Master’s of Real Estate program and a former REIT executive, believes the continued success and evolution of the REIT industry highlights the need to enhance the level of understanding of the REIT structure and what makes it work so well.Speaking on the REIT Report, Morris said he has launched a new education platform, REIT Academy, to fill the void in executive and professional development education in the REIT industry. The inaugural program spans eight weeks, comprised of one evening per week for three hours of live instruction, as well as guest speakers from the industry.Morris said the program will give a student “pretty much everything you need to know to be able to understand any given REIT and come to your own conclusions, using the tools that you'll learn here to assess how to value the company.”

Investors who own their own homes may be taking a limited view of real estate investment, and in turn are missing out on the benefits of owning commercial real estate through REITs, according to Nicole Funari, Nareit vice president of research.Speaking on the REIT Report, Funari noted that oftentimes homeowners think they are already invested in real estate simply by owning their own home. While that is true, they also need to examine the differences between homeownership and owning commercial real estate, she said.“They think they are covered in their investment portfolio when we feel that, no, you really are missing out on the benefits of commercial real estate,” especially because a lot of homeowners don’t consider the breadth of commercial real estate asset classes, Funari said.

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 significa

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

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

High-quality office real estate in New York continued to attract investor interest throughout the pandemic, and the office market overall is “certainly improving,” according to Nadir Settles, head of New York office investment at Nuveen Real Estate.Speaking on the REIT Report, Settles noted that while there hasn’t been a lot of price discovery during the past year, the few transactions that did occur, notably for high-quality assets, did well. “Investors showed that they are willing to come to New York for the right product, even if it was office,” he said.Settles said the New York office market has seen about a 10% drop in rents, “which is not bad for where we thought we were going.” Tenant improvements have increased substantially, while concessions have been made to attract tenants, he noted. Tenants are ready to commit quicker on turnkey space, he said, but they also want flexibility on how the deal is structured.

In a REIT Report podcast interview, Robert L. Johnson discusses his early career, his business strategy, and his insights regarding race in America. Johnson is the founder and chairman of The RLJ Companies, LLC, which sponsored the formation of RLJ Lodging Trust (NYSE: RLJ), and the founder of Black Entertainment Television (BET).During the interview with Nathaalie Carey, Nareit senior vice president for industry affairs and social responsibility, Johnson discusses his coming of age at a time when the United States was “opening doors to Black Americans,” and his underlying belief that “you have an obligation to live up to the tenets of society to make the whole community better."