The Impact of COVID-19 on the REIT Industry (And What’s Next)

Nareit discusses how the COVID-19 pandemic has affected the REIT industry with Managing Directors, Jason Krentler and Jason Easterly at Stout.

04/01/2021 | by

Nareit Staff

Stout is a global investment bank and advisory firm specializing in corporate finance, valuation, financial disputes, and investigations. We serve a range of clients, from public corporations to privately held companies in numerous industries. Our clients and their advisors rely on our premier expertise, deep industry knowledge, and unparalleled responsiveness on complex matters. Learn more at stout.com

Jason Krentler is a Managing Director in the real estate practice within the Valuation Advisory group. He is responsible for management, client liaison, business development, and leads the real property financial reporting practice. Jason’s concentration is in real estate valuation and advisory services, where he has 15 years of national and international appraisal, review, and management experience.

Jason Easterly is a Managing Director in the Valuation Advisory group. He has more than 15 years of real property valuation and consulting experience, with a concentration on valuations for financial reporting and financing purposes. He has extensive experience involving net asset valuations (NAV) for REITs and various real estate companies and fairness opinions involving real estate company and portfolio transactions.

Stout has 30 years of experience in investment banking, corporate finance, valuation, financial disputes, and investigations. Can you talk about how you serve clients in the REIT and commercial real estate industry?

Krentler: Over the last 20 years, I’ve seen Stout’s real estate practice grow from 10 people to almost 40, and our client base grow to encompass some of the largest REITs in the world. The work that we do spans a variety of valuation and advisory services, including financial reporting and accounting advisory, valuations for investor reporting requirements, and net asset value assistance. From a financial reporting perspective, we’re typically assisting clients with purchase price allocations, impairment studies, or fresh start accounting.

Jason Krentler, Managing Director, Stout

Easterly: From one-off local properties to international portfolios, we’re servicing a global client base. But more than the specific work we’re doing for our clients, we’re also focused on client service and how we get the work done. We have a specific mindset around unparalleled responsiveness – we simply want to make every job as efficient and painless for the client as possible.

2020 marked the 60th anniversary of the REIT industry. How does the pandemic stack up in terms of the biggest challenges the REIT industry has faced over the years?

Krentler: In my 20-year career, this appears to be the biggest challenge I’ve seen – greater even than the Financial Crisis of 2008, because the effects have been so devastating to certain sectors. In 2008, we saw massive hits to commercial real estate (CRE) values overnight, but we didn’t see such deep pain in individual segments of the industry. But in the current environment for retail and hospitality for instance, we’re likely to see situations that are unrecoverable for several years. Or we could even see permanent paradigm shifts disrupting those industries. It’s going to be fascinating to see how quickly behaviors rebound that impact real estate like retail, hospitality, and even office.

Easterly: Perhaps the most challenging aspect of the last 12 months has been understanding, and subsequently quantifying, the long-term impacts on certain segments of the REIT industry as a result of the immediate disruption on the global economy, coupled with what appears to be dramatic paradigm shifts within several industries (traditional retail has been completely upended, a return to a five-day a week office schedule is unlikely, and business / leisure travel has been decimated). These changes have had profound effects on three historically prized REIT asset classes: Malls & Big Box Retail, Office Buildings, and the Hotel industry. This stands in contrast to the 2008 financial crisis where, although incredibly painful and destructive, it did not have the same level of impact on human behaviors or create meaningful shifts in the delivery of certain services that the above-mentioned REIT sectors provided.

How do you see the pandemic impacting M&A in the year ahead in the REIT sector?

Jason Easterly, Managing Director & Denver Office Leader, Stout

Krentler: I would say in general we’re quite bullish at this point. But it certainly depends across the sectors. I think we’re seeing the industrial, multi-family, and manufactured home communities (MHC) markets about as hot as possible. Large year-over-year growth, huge demand, and limited supply. And cap rates are still really aggressive on the quality assets.

For the sectors you would expect to be challenged – office, retail, hospitality – we’re still expecting some time on the recovery. Although I am definitely starting to see deal activity trend up in these segments, just at tempered purchase prices that reflect the short-term issues.

We try to gauge similar sentiment with our clients, and I think most are seeing the same trends. With everything that has happened over the last 12 months, we still think there is a lot of pent-up demand in the REIT sector for institutional assets.

Easterly: We’ve already seen certain sectors hold up quite well, if not outperform prior time periods. The successful owners and operators didn’t just become so by happenstance – they’re the thought leaders and change agents in the industry so we’re excited to see how these organizations adapt their strategies moving forward.

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