David Bonser, a global managing partner at Hogan Lovells, says with M&A activity robust and financing readily available, REITs are in a much better place today than was expected just six or 12 months ago.

11/16/2021 | by

REITs are in a much better place today than had been expected six or 12 months ago, says David Bonser, global managing partner of the corporate practice and global head of the REIT practice at Hogan Lovells. The market is strong, mergers and acquisitions (M&A) activity is robust, and financing remains readily available.

While a few sectors are lagging, most REITs are poised for growth, Bonser says. He spoke to REIT magazine on the broad themes he is watching and his expectations for the industry as it emerges from the depths of the pandemic.

In terms of REIT opportunities for growth, what sectors are best poised to take off in the next year?

It's always hard to predict where things are going, but shopping centers and data centers have been doing well and don't show any signs of reversing that trend. Industrial real estate of course has been strong for several years, but pricing in that space—remarkably—continues to improve, and so that sector is not going to take off, but I expect it will remain strong. The most interesting sector that could take off is hotels, as soon as business travel shows real signs of picking up.

With work from home and hybrid working arrangements becoming more prevalent, how will office REITs be affected?

In the near term, there remains a lot of uncertainty about demand for office REITs. However, this uncertainty will dissipate at some point soon. Once that happens, then buyers and sellers might start to coalesce around what office buildings are worth in the post-pandemic world. If that happens, I wouldn't be surprised at all to see more transactions in that sector.

David Bonser, global managing partner of the REIT practice at Hogan Lovells.
David Bonser is the global managing partner of corporate practice at Hogan Lovells, and the global head of its REIT practice. In his decades in the industry, he has served as counsel to issuers and underwriters for dozens of public company REITs.

Do you see a repurposing of office buildings in large metropolitan areas?

Real estate people are very smart, and when they figure out there is a better way to make money out of the real estate that they own, they typically move quickly to capitalize on that opportunity. The key is whether the owners of office buildings have access to enough capital. If they don't, I don't see them undertaking many efforts to repurpose, and instead likely will look to sell if they see significant declining demand in the future. However, many of the large public REITs do have access to substantial amounts of capital. So, yes, I could see those companies doing some very interesting things with some of their assets.

Can you discuss some of the trends driving increased M&A activities in real estate?

We are still seeing a lot of capital that has been sitting and waiting to be deployed into real estate, and it's been sitting for quite some time now because of the pandemic. As we gain more certainty around post-pandemic life, companies are deploying that capital more confidently, leading to more M&A activity. On the sell side, you're seeing some companies realizing that they are capital constrained coming out of the pandemic, and for their portfolio to realize full value they'll need to spend significant dollars repositioning their portfolio. In that event, they may well conclude that it makes sense to do a merger with another party that has better and cheaper access to capital, essentially taking the bird in hand rather than waiting for the portfolio to realize more value down the road.

Industrial real estate benefited greatly in the pandemic. How do you see this sector performing in the future?

You would have made a lot of money over the past three years by not listening to people who were saying that industrial prices had topped out and that it was time to exit industrial. Every time I think that sector is fully priced, the values continue to rise. So, while surely the sector can't maintain the level of growth it has seen in the past three years, I wouldn't bet against it either.

Can you talk about the transition of retail REITs to more of an experiential customer environment?

Smart mall REITs have figured out that in many cases they own incredibly valuable real estate. They have figured out that populating that real estate with department store anchors may not work that well anymore. However, they can put something else there that will drive people to the mall, replacing department stores with new tenants that offer a unique experience to customers. The key is to identify the entertainment that will bring customers physically to the area.

Climate change and sustainability measures are top of mind these days. How are REITs responding?

This topic is getting a lot more attention in boardrooms of public company REITs and obviously is a big focus of many institutional investors. As a result, management teams are spending a lot more time thinking about ways to develop real estate in a way that is much more climate friendly than in the past. It is a process that is not quick or cheap, but I expect in five years you'll see some real advances in this area in real estate.

What are some of the biggest changes you've seen in the REIT industry and what might we expect going forward?

The industry has really matured since the initial public offering (IPO) wave of the 1990s. We don't see near the level of IPO activity today as we used to, which is not surprising. In a mature industry, there are two things to look for: First, I would expect to see increased M&A activity over time, with the stronger REITs acquiring REITs that face more challenges. And second, hopefully we will see a little creativity in terms of different kinds of REITs entering the sector. We saw that with data centers several years ago, and then single family rental home REITs. I would expect to see REITs pop up in unusual asset classes, although that may still be a few years away.

Can you elaborate on the outlook for REIT IPOs?

To go public today, you need to present a compelling case to investors in terms of why they should be buying your stock versus a multitude of other companies. For a company to go public, it has to truly differentiate itself from its peers. And oftentimes these companies can get more value for their owners by selling rather than going public. So I remain a little bearish on the likelihood of seeing many REIT IPOs. I think there will a few each year, but I don't see an IPO wave any time in the near future.

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