Amid a backdrop of tumultuous markets, questions on the outlook for interest rates and tariff uncertainty, publicly-traded REITs continued to post net operating income growth and maintain strong balance sheets, according to the latest Nareit Total REIT Industry Tracker Series report.
REITs posted 4.8% year-over-year growth in NOI and 2.7% growth in same-store NOI. On the downside, funds from operations for all equity REITs fell 1.1% year-over-year to $19.9 billion. However, Nareit attributed the decline to macro factors tied to a weakening dollar, which affected REITs with non-U.S. operations. In all, just more than half of REITs (52.5%) posted a year-over-year increase in FFO.
In addition, Nareit also published an updated look at how the largest actively managed real estate investment funds are managing their portfolios. The analysis captures allocation shifts and measures how much the funds, in aggregate, are overweight or underweight to various property sectors relative to the FTSE Nareit All Equity REITs Index.
Notably, telecommunications had the largest share in actively managed funds, unseating residential, which had held the top spot since 2017. The analysis also found that funds are now equal weight on the office sector for the first time post-pandemic.
WealthManagement.com spoke with Ed Pierzak, senior vice president of research, Nicole Furnari, vice president of research, and John Worth, executive vice president for research and investor outreach.
This interview has been edited for length and style.
WealthManagement.com: Let’s start with the latest T-Tracker. What are some of the highlights from REIT performance in the most recent quarter?
Ed Pierzak: On operations, the year-over-year NOI and same-store NOI growth numbers look quite good. Traditional NOI growth came in at 4.8% and same-store NOI at 2.7%. In both cases, it looks as if REITs are very much keeping pace with inflation.
If you step back and look at the last few years, it’s been a period of change. Financial markets, the economy and property markets have been changed by a very significant moderation in inflation after hitting its peak during COVID. We’ve also seen a surge in interest rates, and also this divergence between public and private real estate valuations. Despite all those changes, REITs have performed quite well from an operational perspective.
One thing I have to note, however, is FFO was negative in the quarter at -1.1%. FFO can be influenced by sector or individual constituent one-off events. In this particular round, we had a number of REITs reporting declines in FFO related to the weakness in the dollar—particularly constituents with some non-US operations. Although tariffs overall have not had a material impact on REIT performance, you can see it seeping through on the operational front based on the strength of the dollar.
WM: What accounts for the gap between same-store NOI and overall NOI growth?
EP: It accounts for acquisitions and dispositions. In general, REITs have been net buyers on the margins. They are always in the market. They pruning portfolios a bit as well, but they tend to buy more than they sell and that’s been additive to NOI.
WM: You’ve also noted in our conversations that REITs have maintained discipline on their balance sheets and how they’ve stuck to that throughout this same period of time.
EP: This period of change began at the beginning of 2022, so we can use the measurements at the end of 2021 and look today and see if we’ve had any material changes in balance sheet metrics.
Leverage ratios have come up a bit (from 26.5% to 33.5%), but that’s still at a level that you could consider a core strategy. In addition, fixed-rate debt is still a heavy focus (88.1% vs. 89.6%). And unsecured debt has increased some (77.3% to 80.6%).
The term to maturity has declined a bit (7.2 years to 6.1 years), but when people start talking about issues with refinancing and walls of maturities, they are often talking very short-term—in the next 12 to 18 months. REITs have quite a bit of runway before they have to worry about maturities. The cost of debt has increased (3.3% to 4.2%), but that’s still a very attractive rate in comparison to anything you can get out there in terms of a more traditional mortgage.
WM: Does anything stand out by property type in the T-Tracker?
EP: Office occupancies are a little lower than other sectors, but they have leveled out at 85% and that’s a stronger showing than you would see on the private side.
Industrial occupancies have been declining, but some of that is due to the addition in the index of cold storage to the industrial sector. That segment traditionally operates at a lower occupancy rate than traditional warehouse and logistics. If you were to control for that, you would see the occupancy for traditional warehouse and logistics at 95%.
WM: Pivoting to another topic, Nareit published its most recent look at trends among active managers of funds that own REITs. What are the highlights?
Nicole Furnari: There are some long-term trends and some short-term trends at play. On the long-term side, the strong growth in telecom has meant it’s now the largest share in actively managed funds. Residential took over as the top allocation by share in 2017, but now, for the first time, telecom is the largest.
Funds were underweight on telecom REITs for a long time. Now, they are at 136% of the index share. Meanwhile, healthcare is a little down in the recent quarter, but still up a lot on an annual basis. It’s been gaining steadily for the last few years and is one of their favorite sectors.
For short-term trends, with back-to-work initiatives picking up steam and other changes in the economy, office is coming up from less than a 50% share of index weight to now meeting its index share.
WM: Not surprisingly, the share for data centers also is overweight relative to the index, correct?
NF: There was a little edging away from data centers after the DeepSeek news late last year, but then it flipped back pretty quickly.
Overall, we are seeing the trends that are playing out in the economy at large. These movements also somewhat mirror what’s been going on with the index overall. Healthcare, telecom and data centers have all been gaining in the index.
John Worth: One thing that’s quite interesting is when you are talking to institutional investors, industrial a year ago was overweight and then people started having concerns about supply and started to underweight it. Institutions that purely have private real estate strategies struggle to adapt. They are locked in. When you have a liquid way to invest you have the ability to pivot between sectors based on supply and demand.
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