07/30/2021 | by
Stephen Richford
Stephan Richford, U.S. Head of Real Estate at BMO Capital Markets.

Stephan Richford is U.S. Head of Real Estate at BMO Capital Markets. He has worked directly on more than $75 billion in real estate advisory and capital markets transactions.

What does capital market activity in 2021 tell you about the health of the REIT industry?

Overall, REIT capital markets are quite healthy and functioning well. Equity investors are showing support for new issuance. REITs are accessing equity smartly around use of proceeds or through forward trades. I would also note valuations have rebounded nicely for COVID-sensitive sectors. The biggest issue looks to be competition from private capital. On the debt side, we continue to see robust demand from debt investors, again including sectors like office that were more impacted by COVID.

Is competition for loans consistent across all asset classes?

When you look at certain pockets in the market, be it industrial or apartments, or maybe select health care sectors, you could make a case for excess competition for loans. Debt investors, however, are taking a very cautious tone when it comes to retail and office with debt funds filling some of the demand in sectors like office and hotels. 

On the CMBS side, there are single asset single borrower (SASB) deals getting done in multiple sectors, including office, so that’s quite promising. We’re also watching what’s happening in the debt markets for residential loans. With GSEs reducing their capacity in 2021, in addition to affordability requirements, you’re seeing some of the deals that might have gone to Fannie and Freddie going into the CMBS market.

Do you anticipate adjustments between public and private real estate valuations?

The public market appears to be rationalizing the right basis for certain asset classes.  In COVID-sensitive asset classes we have seen upward value adjustments to start 2021—asset classes that performed better operationally than expected in 2020. Again, competition from private capital is intense and you could make the case that the private markets are valuing real estate assets higher than the public markets in sectors that both outperformed and underperformed in 2020. Ultimately, this reconciliation will drive valuation adjustments, likely through transaction activity in 2021 and into 2022.

What else are you watching for 2021?

The first is the reopening and how that plays into operating performance and share prices. Ultimately, that’s where you could see valuations flip back to favor the public markets. 

The second is the continued evolution of ESG and its impact on capital formation, investment activity, and capital markets execution. Finally, the prospect of proposed tax changes and whether that brings real estate sellers to the market earlier than expected. This potential trend could unlock significant transaction activity, with REITs uniquely positioned and qualified to tackle ownership tax issues.

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