01/23/2023 | by
Bloomberg Webinar

Nareit and Bloomberg Intelligence co-hosted a webinar Jan. 19 titled Navigating Uncertain Times: The 2023 REIT Market Outlook, which looked at how REITs and CRE will perform this year.

The conversation, moderated by REIT analysts Lindsay Dutch and Jeffrey Langbaum from Bloomberg, featured panelists:

  • Brandon Benjamin, Director, Real Estate Securities, Public Securities Group, Brookfield Asset Management
  • John Worth, Executive Vice President, Research and Investor Outreach, Nareit
  • Ji Zhang, CFA, Senior Vice President and Portfolio Manager, Global Real Estate, Cohen & Steers.

Key takeaways from the discussion included:

  • The listed real estate market overcorrected in 2022.
  • 2023 will be the year of price discovery.
  • Health care and data centers are sectors to watch.
  • REITs will be up this year.

The discussion kicked off with a presentation from Worth, who looked at some of the key findings from Nareit’s 2023 REIT Outlook. Looking at 2023 through the lens of last year, Worth stated that “the word for 2022 is divergence” because of two types of divergence: the gap between REITs’ low stock market valuations and their strong operational performance and the gap between public and private real estate valuations. “Historically, when we see wide divergences between public and private markets, we see markets come together anywhere between six and 18 months,” said Worth during his comments. He predicted that they’ll start to come back together in 2023, “through better REIT performance and private markets starting to price in the impacts of high interest rates.”

During his presentation, Worth emphasized other findings from the report, including that:

Listed real estate market overcorrected in 2022

Both Zhang and Brandon noted that it was difficult to reconcile REITs strong operating performance with their low stock market valuations. Zhang said that the listed real estate market “overcorrected to the downside” in 2022 because it quickly reacted to the higher financing environment and growing risk of a recession.

Brandon agreed and said he sees this year as a “really attractive entry point”’ for REITs. Zhang echoed his sentiments, explaining that when you look at REIT returns since 1990, on average, you see returns of about 10% in the 12 months after a recession and 20% during an early cycle period. That’s why looking forward, “we feel pretty optimistic about returns for REITs,” she said. “Particularly in line with the correction we’ve already seen,” Zhang added.

2023 will be the year of price discovery

Turning to the outlook for mergers and acquisitions (M&A), Worth noted that over the past three years, 65% to 70% of deal value for M&A transactions has come from listed REITs joining together within the same sector to build out operating platforms, increase economies of scale, lower cost of capital, and prepare for growth. “Building out operating platforms and getting those economies of scale will be one of the key themes not just for this year, but in three, five, and seven years,” said Worth. Zhang largely agreed with Worth’s assessment of public-to-public REIT M&A deals, but she explained that over the course of 2023, there will continue to be “a pause in the market for large scale M&A activity because of the macro uncertainty right now.” She added that we should see that return though once there is a little bit more stability in the environment.

Brandon expounded on Zhang’s thoughts, saying he expects an increase in M&A at some point, but he doesn’t know if it will happen in the first or even second half of 2023. “One of our themes for 2023 is an extended price discovery year, as privates and publics get more visibility into what the Fed will do and how financing costs will shake out,” he said.

Sector Watch: Health Care and Data Centers

The conversation moved to specific sectors that the panelists are watching most closely. “We’re very constructive on the health care sector, and specifically senior housing,” said Brandon. He discussed how the combination of accelerating demographic trends with the post-COVID recovery in occupancies is driving pricing power to come back. “We’ve been talking for many years about the demographic trends that support senior housing and health care in general,” stated Brandon. “Ten years ago, we said, ‘Wait until we get to the 2020s.’ Well, we’re there. A lot of those demographic trends are going to accelerate in a powerful and exciting way for healthcare REITs,” he added.

Zhang noted that she and her team are watching the data center sector because it is going through an interesting change. The demand for and supply of data centers and communications towers has been positive over the past decade, but that supply is changing, she explained. Zhang said that more municipalities are placing moratoriums on data center construction and limiting power allocations in data center markets. When you combine that with global supply issues, she continued, that has made it harder to build data centers. Yet demand is still very strong, which is giving data center landlords very strong pricing power. “I think that is a very positive set up for the sector in the coming years….over the next three, five, and 10 years as we do more things online, have more AI, and have more smart homes and cities, the more data will be generated and that will be a significant tailwind within the space.”

Panelists agree: REITs will be up this year

The panelists ended the discussion with answers to a lightening round question. The moderators posed the question: “What is there a better chance of? REITs up single digits, REITs up double digits, or REITs down.” Both Zhang and Brandon said that REITs would be up single digits, while Worth said low double digits.

To view the recorded webinar, register here and see it on demand.

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