First quarter REIT performance and upcoming trends to help benchmark and analyze exposure within the sector were the focus of the April 7 FTSE Nareit U.S. Real Estate Indexes in Review & What’s Next webinar.
Hosted by Nareit and Institutional Real Estate, Inc. (IREI), the quarterly webinar featured John Worth, executive vice president of research & investor outreach at Nareit, and
Eric Rothman, portfolio manager at CenterSquare Investment Management, LLC. Mike Consul, senior editor of IREI’s Real Asset Adviser magazine, moderated the discussion.
The FTSE Nareit All Equity REITs Index posted a total return of 3.8% for the year to March 31, which Worth described as a “pretty good start to the year.” At the same time, the conflict in Iran is “really coloring where we stand today,” he added.
Rothman agreed that REITs were in a solid position, noting that the sector was “set up well” at this point in the year. He pointed out that higher energy costs resulting from the Middle East conflict would likely have little direct impact on REITs, although secondary impacts such as higher inflation and higher interest rates were numerous. Sustained higher energy prices would probably act as a brake on the overall economy, he noted. Meanwhile, the Federal Reserve would need to be patient, he said, given the volatile geopolitical environment.
Turning to REIT sectors, Worth explained that the quality divide continues to play out in office, with REITs mainly owning the high-end properties that are most in favor. He pointed out that New York City stands out for its near-full office occupancy rate. Rothman added that, despite concerns that AI is putting a damper on office jobs, demand from AI tenants has in fact boosted parts of the office sector.
Additional takeaways from the webinar:
- Worth said REIT outperformance had resulted in some narrowing of the gap between REITs and broader equities, although there is “still room to run” to close that gap.
- Rothman noted that a resetting of prices in the public markets makes this a good time to increase REIT portfolio weights.
- Health care REITs are benefiting from the growing population cohort of 80-year-olds.
- REIT active managers have been significantly overweight in data centers, despite market noise in the sector.
- As REITs become a growing part of the economic fabric of the U.S., they become increasingly impacted by policy issues and political discourse, Worth noted.
- Rothman described moves to rein in institutional ownership of single-family rental homes as “counterproductive” to efforts to increase housing affordability.
- While the pace of REIT IPOs has been slow for the last couple of years, over the longer historical span the number of IPOs has been “pretty steady,” Worth said.
- Even if there is a macroeconomic slowdown, relative REIT performance is likely to be “quite good: this year,” Worth stated.
- Rothman said REIT returns of 8%-12% are possible in the next 12-18 months.