REITs have demonstrated resilient operational performance and are well prepared for the continued economic uncertainty, higher interest rates, and elevated inflation expected in the coming year, says Ed Pierzak, Nareit’s senior vice president for research.
Speaking on the Nareit REIT Report, Pierzak noted that REITs are not only performing well but are keeping pace with inflation. Meanwhile, balance sheets are in “great shape,” with leverage ratios near historical lows.
With the risk of recession a dominant theme for 2023, Pierzak pointed out that “a recession does not have to equate to negative property total returns.”
A Nareit analysis of the last six U.S recessions shows that on average, REIT's underperformed private real estate in the four quarters before a recession. However, REIT's outperformed private real estate both during a recession and in the four quarters after. A comparison of the FTSE Nareit All Equity Index to the Russell 1000 Index found that it outperformed broader equities before, during, and after recessions.
“When we take a look at all this, we see that traditionally, REITs have been well positioned to take advantage of economic recoveries,” Pierzak said.
Meanwhile, Pierzak noted that higher interest rates and debt costs are “throttling” real estate transaction volume but added that the one silver lining in this scenario is that new development is being curtailed as well.
Turning to the performance of public and private real estate, Pierzak described a “pretty major divergence” during the past year or so.
“What we find is that the divergence in public and private real estate valuations has really increased the attractiveness of REITs,” Pierzak said. Going into 2023, “we expect that this cap rate gap is likely going to compress, but this compression is going to be a result of both private and public market changes.”