Fundamentals for U.S. REITs have moved beyond COVID-19 “very distinctly,” with market rent growth, occupancy gains, and cash flow rebound evident across a range of sectors within the industry, according to Cedrik Lachance, director of global REIT research at Green Street.
Lachance, who assumes his new role as Green Street’s director of research on July 1st, spoke on the REIT Report.
From a GDP perspective, 2021 is a “year of rebound,” Lachance said. He noted that manufactured homes and industrial real estate are two sectors that Green Street believes will have the best combination of market rent growth and occupancy gains over the next five years.
From a cash flow perspective, a significant rebound is also occurring in sectors that were negatively affected during the pandemic, including senior housing and lodging, Lachance said. At the same time, he pointed to “very attractive sustainable growth” for the next few years in sectors such as apartments and student housing. A number of other sectors should experience net operating income (NOI) growth in the 4-5% range for the next couple of years, he said.
Turning to M&A activity, Lachance noted that, particularly in the public markets, deals have tended to occur between companies with a disparity in the cost of capital. Those deals “make a ton of sense,” he said. Going forward, M&A activity is most likely to occur between companies that have notable similarities but a relative difference in their cost of capital, he noted.
As for the future of office, Lachance said that Green Street views work from home “as really the defining story of the real estate world in the pandemic,” and one where the influence extends to a range of other real estate sectors including residential, hotels, and suburban shopping centers. Lachance said the lack of clarity into the future of the office sector will likely last for another 12 months, but “when it’s all said and done, you’ll have about a 15% drop in office demand.”
Lachance also commented on trends in European real estate, including the growth of non-traditional sectors. As for broader trends, he noted that Green Street firmly believes that public markets will remain an area of growth for REITs. Lachance also commented on the inflation hedge benefits of real estate.