Like other securities, public REIT stocks have ridden a roller coaster this year as on-again, off-again tariffs sent markets into a tailspin when announced, only to rapidly recover as they’ve been tweaked, delayed and scaled back.
Amid that backdrop, REIT fundamentals have remained resilient. Firms have reported rent growth, solid occupancies and have maintained healthy balance sheets.
The end result is that year-to-date through June 17, total returns for the FTSE Nareit All Equity REITs Index were up 1.8%.
Todd Kellenberger, REIT client portfolio manager, Principal Asset Management, wrote in a recent outlook piece that market conditions at midyear create “a favorable set-up for the REIT market to deliver attractive returns driven by steady, positive growth in many sectors.”
He pointed to debt markets remaining open to REITs at attractive terms and added that some sectors, such as seniors housing and wireless towers, remain “insulated from the uncertain macro environment while other sectors such as industrial and hotels are facing headwinds.”
Kellenberger added that global REITs are trading at a 32% discount to the long-term average spread and rarely have been cheaper relative to global equities than they are currently.
WealthManagement.com caught up with Edward F. Pierzak, Nareit senior vice president of research, and John Worth, Nareit executive vice president for research and investor outreach, to discuss the current state of REITs.
This interview has been edited for style, length and clarity.
WealthManagement.com: You held REITWeek earlier this month. Can you talk about any top takeaways from the event?
John Worth: We had 160 REITs at the event, over 2,500 people and over 2,500 investor meetings took place. It was an extravaganza of investor opportunities to connect with management teams and get their views of where their businesses are in light of trade turbulence, resurgent concerns about economic growth and a slightly higher rate environment.
We had three takeaways. From an operational and earnings perspective—amid macroeconomic concerns and trade uncertainty—REIT management teams are not stepping away from the guidance they had provided earlier in the year. Their businesses have been resilient. It was a real positive that we heard across the breadth of companies that were there.
Secondly, as we’ve gone through this period of higher volatility, property transaction volume has definitely slowed down. Coming into the year, we felt we may see transactions come back and a great opportunity for the public/private valuation divergence to close. It’s a climate where REITs would be more likely to be acquirers. However, REITs are still feeling their way and the transaction market has been slower than expected because of the broader market volatility.
A third piece is that given the nature of REIT balance sheets, they have steady access to capital, so when those property transactions become available, they will be looking for accretive growth opportunities.
Ed Pierzak: I’d add two pieces to John’s comments. Looking at the REIT Industry Tracker from the first quarter, we had a consistent message that REITs are in good shape. Same-store NOI growth was 3.2% year-over-year. REITs are keeping pace with inflation. Occupancy rate levels also remain high, just below 93% overall.
With REIT balance sheets, leverage ratios are low, and they have a high weighted-average terms to maturity. The cost of debt is around 4.2% and REITs are still focusing on fixed-rate debt, with access to unsecured debt.
As John mentioned, we have had a lot of uncertainty in recent months, but when you look at operational performance like this and their balance sheet discipline, REITs are well-suited to weather anything that comes. Maybe more importantly, we are not seeing a lot of transactions, but as soon as transactions make sense or come to the market, REITs are in a great position to be first movers.
WM: Since the last time we talked, one of the biggest things driving volatility has been the shifting picture on tariffs. That’s driven a lot of broad market activity. How have REITs been affected amid all of this?
EP: We have put together a few pieces analyzing this, the most recent published toward the end of May.
The reason for this is that there’s a lot of discussion in the media that’s been, essentially, “Tariffs bad” without a lot of nuance. We wanted to quantify to what extent and what sectors faced the biggest challenges, and also how things have changed given subsequent changes in the announced tariffs.
Starting with April 2, which was the official announcement of reciprocal tariffs, not surprisingly, you saw negative results, not just with REITs, but across the market. The decline for REITs was in line with the decline in the S&P 500. But we also saw dispersion. Industrial and lodging/resort REITs were the hardest hit. Telecom and data centers had negative results, but at half the level that saw in industrial and hotels.
Then a week passed, and we got an announcement of the pause in tariffs. Tracking for that week and through May 11, there was a bounceback. In some sectors, REITs recovered beyond the initial April 2 starting point. In others, they came close. Although there has been mixed messaging and a “game on/game off” nature to the tariffs, people started to get more comfortable with the environment.
On May 12, we got the announcement that the U.S. had reached an agreement with China. We had a bit of a thaw. And over the next several days, we ended up seeing a further increase in REIT performance across sectors.
When I look at all this, we have this degree of uncertainty. It’s taken some time for the public to digest and understand the current environment. Looking at the Bloomberg forecast, at one point, we had a huge increase in the probability of a recession in the next 12 months—albeit the number never got above 50%. But as time has passed, we’ve had a pullback.
Ultimately, a lot of elements of the economy remain fine. There is still some uncertainty and we have higher rates and people are wondering when or if the Fed will act.
And for REITs, it’s been a roller coaster, but we’re now back essentially to where we started the year and REITs are still in a good position.
WM: Amid all of this uncertainty, are there ways investors can look at REITs for opportunistic investments?
EP: There are some tactical plays here. Dips on REITs can oftentimes be good buying opportunities. As we talked about with the industry tracker, fundamentally, everything is solid. The divergence between private real estate valuations and REITs still exists. With that, the implication is that REITs do offer access real estate at a discount.
JW: I would add that when you look at the experience of the tariff announcements, all sectors don’t react the same. Some ended up being more defensive, telecom among them, because demand is intrinsically domestic.
In addition, the ability to insulate and find opportunities by investing globally using REITs also stands out. It’s unique in that during the last several years, normally when you looked at the three major regions (U.S., Europe and Asia), you saw the U.S. as the outperformer. This year, Europe is up 20% in dollar returns and Asia is 17%, with the U.S. bouncing around 1% to 2%. Some of that is driven by dollar devaluation, but not all.
WM: The recent market conditions and the higher correlation between stocks and bonds has also once again raised questions about whether a 60/40 portfolio is sufficient to achieve diversification. Has the recent period shone a light on the role REITs may play in that equation?
JW: We would say the 60/40 portfolio has been out the window for quite some time. There is a meaningful role for REITs, with up to 15% allocated in a REIT portfolio optimization strategy. Institutions, pension funds and sovereign wealth funds have embraced real estate for 20 or 30 years. We’re now seeing individuals and direct contribution plans getting access to real estate. It’s a fundamental asset class and REITs are a great way to implement that strategy.
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