07/06/2022 | by

Nareit and Bloomberg Intelligence co-hosted a webinar on June 29, Interest Rates, REIT Capital Raising & Cap Rates, which looked at how REITs are grappling with the twin challenges of high inflation and rising interest rates, including how those challenges are affecting expansion and the capital raising environment.

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

  • Haendel Emmanuel St. Juste, Managing Director, REITs, Mizuho Securities
  • Stephan Richford, U.S. Group Head, Real Estate Investment Banking, BMO Capital Markets

The discussion kicked off with a look at how the current macroeconomic environment is affecting equity and debt issuance. The panelists agreed that there will not be a lot of common share equity issuance and that debt issuance is slowing down. “There has been such a favorable debt tailwind for the last five to seven years, but what was once a tailwind is increasingly a headwind when it comes to refinancing debt,” St. Juste said. “Companies will likely be more selective in how they raise debt capital, and perhaps lean toward more shorter-term debt, such as five or seven years,” he added.

The theme of how rising costs of debt and financing are affecting REITs continued, as panelists turned to current and future corporate merger and acquisition (M&A) activity. Richford noted there was a high amount of M&A activity over the last 18 months that was largely led by institutional buyers and that it would be tough to continue to transact in this environment. He explained that some of those buyers were highly levered, and while we likely won’t see the same amount of M&A activity going forward, the current interest rate environment may give REITs a more competitive advantage in future M&A deals.

The conversation moved to an in-depth look at how different property sectors are performing, including residential, retail, industrial, and office REITs, and what the future could look like for them. Using multifamily development as an example, St. Juste talked about the residential sector. He discussed the high yields that multifamily has seen recently and how it has been partly driven by higher rental rates. “But economics are changing… I think [residential] near term has some good profit margins to point to, but not as good as they were six or 12 months ago,” he concluded.

Turning to the retail sector, St. Juste explained that “open-air shopping centers have decent near-term tailwinds….occupancy is at pre-covid levels, rents are up, and spreads are positive.” He added that there could be some pullback in the next three to six months, though, with consumers starting to tighten their belts and the possibility of entering a recession.

Richford agreed with St. Juste on the outlook for open-air shopping centers. “But when I think about retail today,” he said, “I don’t think of e-commerce vs. bricks and mortar; the reality is, it’s just all retail.” This has implications for the industrial industry, Richford elaborated. As bricks and mortar get better at doing e-commerce and vice versa that will result in robust demand for industrial, he concluded.

The panelists ended the discussion with a look at the office sector. “We need to remove the term hybrid. It has become meaningless,” stated Richford. “I think eventually we’ll get to a place of flexibility, but it will be more refined around function and role and usage of office…Office will still garner heavy leasing and activity in best markets, and I think it will have a comeback once we get to a stabilization point.”

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

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