Investors’ outlook on REITs and capital markets was the topic of a lunch general session at Nareit’s REITworld: 2023 annual conference, held November 14-16 in Los Angeles.
Nareit’s 2024 President Matt Kelly, CEO JBG Smith (NYSE: JBGS) moderated the panel, which also included: Jeff Horowitz, global head, real estate, gaming and lodging, BofA Securities; Kerry Johnson, Co-President, US Real Estate Sector, DLA Piper LLP; Rick Romano, Managing Director, PGIM Real Estate; and Steve Sakwa, senior managing director and senior equity research analyst at Evercore ISI.
On the topic of REIT income and access to capital, Sakwa described the current environment as a “tale of two cities,” with shorter-term assets like apartments and self-storage feeling the impact of new supply. On the other hand, “we saw some really nice growth in health care companies,” particularly senior housing that “was decimated during COVID.” He said the growth in the industrial sector is likely to continue till 2024. However, broadly speaking, according to Sakwa, “the road is still quite rocky for the next year.”
Romano said macro factors are boosting investor sentiment, adding that if we get some stability in rates, next year could look pretty good.
Meanwhile, Horowitz explained how REITs are prepared for a higher-long rate environment. “The public markets are in really good shape,” he said, adding that public companies generally have an average debt maturity of five years at rates below 4%. “This is a moment when REITs should finally be able to play an aggressive game… We have to be a little more optimistic and a little more upbeat because it’s not so bad,” he said.
Elsewhere in the panel discussion:
· Johnson said green bond issuance has declined since 2021. “What we’re hearing from investors is that when you’re marketing securities you want to focus on the fundamentals – the quality of the portfolio, loan administration, strength of the balance sheet. “Wouldn’t want to deviate from the usage.” While green bonds are not going away, they are likely to become less popular, he said.
· On the M&A front, the “haves” are buying up the “haves” at very incremental levels from a cost of capital perspective,” Romano said. “Looking at the capital markets at the moment, REITs are quite likely to play an aggressive role. Are in good condition.”
· “The office is by far the most distressed, dislocated asset type, with probably the most uncertainty,” Sakwa said, however, “work from home is decreasing and people are coming back to the office more regularly.” Romano said greater visibility into valuations will be needed before active managers can stop undervaluing the office sector.
· AI will drive a wave of construction in the data center sector over the next three to five years which REITs can take advantage of.
· Sakwa estimated the Fed could cut rates three to four times in 2024, which could push REITs 15-20% higher, with gains in the back half of the year. Horowitz predicts a return of IPOs to the REIT market.