Nareit's REIT Report Podcast

The potential for rolling country-level recessions and the impact of higher interest rates on transactions and capital flows are among the main themes influencing global real estate investment in 2023. The result, according to Citi’s global real estate research team, are opportunities mixed in with the broader uncertainty facing investors.“I think there's a lot more uncertainty entering 2023 than we've seen at least in the past few years, putting aside COVID. I think that's going to be the biggest challenge and opportunity depending on how that turns out,” Nick Joseph, Citi’s global head of real estate and head of the U.S. real estate and lodging research team, told Nareit’s REIT Report podcast.Global sector-specific trends that Citi is monitoring include: the future of the office; e-commerce and the impact on brick and mortar; lodging demand and recovery; health care coming out of the pandemic; housing trends; and digital transformation and its impact on infrastructure.

The REIT industry is undertaking “critical” work to ensure that real estate’s leadership, staff, and procurement opportunities better reflect the nation’s wider demographics, says Ayris T. Scales, Nareit’s senior vice president for social responsibility and global initiatives.Speaking on Nareit’s REIT Report, Scales said that Nareit is working together with its REIT members to accelerate change collectively and “elevate the way that we do things on behalf of the industry.”Scales outlined two key projects underway at Nareit to advance diversity and inclusion throughout the industry.She noted that the grant application process for the Nareit Foundation’s Dividends through Diversity, Equity, and Inclusion (DDEI) Giving Campaign opened this week.Among the groups urged to apply, Scales said, are organizations focusing on ways to help secure talent for the real estate industry by looking at ways to expose high school or college students to real estate opportunities through mentorship, internships, and any other types of leadership and professional development opportunities.

REITs have historically made solid returns following the onset of a recession, particularly in the early stages of the cycle, making this an ideal time for investors to begin building an exposure to the asset class, says Rich Hill, head of real estate strategy and research at Cohen & Steers.Speaking on the Nareit REIT Report, Hill said REITs have historically produced average 12-month forward returns of more than 10% following the onset of a recession, with early-cycle returns exceeding 20%.

A recovery in the real estate capital markets is likely to begin around the middle of the year, with transaction activity becoming better supported over the course of 2023 as financial stresses start to ease, says Richard Barkham, CBRE’s global chief economist.Speaking on the Nareit REIT Report podcast, Barkham said, “real estate capital markets tend to lead the economy, both on the downside and in the upturn…it’s going to take a while for investors to start to move because they want to assess the situation in terms of fundamentals. But we do see a capital markets recovery beginning around mid-year.”Barkham said transaction activity is likely to become better supported over the course of the year as financial conditions improve, primarily in the second half of the year. However, “that's not to say there won't be activity in the first half of the year. There is a record amount of capital looking to deploy in real estate and looking for opportunities, particularly if pricing is a little bit more favorable.”

Centers for Leadership Excellence (CLE), a new initiative from the Ferguson Charitable Foundation, seeks to introduce ethnically diverse college students to career opportunities available in real estate, with the long-term goal of helping to change the racial and ethnic composition of the sector.“We want to get these students into the boardroom and into the c-suite because as leaders they can effectuate change,” Bill Ferguson, chairman of Ferguson Partners and president of the Ferguson Charitable Foundation, told the Nareit REIT Report.Ebony Mitchell, director of strategic initiatives at Ferguson and student liaison for CLE, noted that with the lack of ethnic diversity in commercial real estate, “there's been a limited number of role models and mentors of color to attract young collegiate talent on and off campus.” She added that many of Ferguson’s clients have also struggled with attracting diverse talent, especially at the entry level due to traditional campus recruiting efforts.Ferguson explained that students selected into the CLE Program are required to take a certain number of courses in real estate in order to graduate with a minor in real estate. Given Ferguson’s vast network of corporate relationships across 12 sectors in the real estate industry, “we are connecting them with clear opportunities,” he said.

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.

Decarbonizing buildings is crucial for achieving net zero emissions goals. Retrofitting existing buildings is necessary as 80% of office buildings will still be standing in 2050. Current retrofitting rates must triple or quadruple to meet targets. The podcast discusses the environmental case for retrofitting and the challenges it brings. It also explores different levels of retrofitting and the costs, challenges, and opportunities associated with it.

Constriction in the credit markets has caused real estate investment transactions to slow, but there’s still plenty of dry powder on the sidelines ready to execute as soon as clearer price discovery emerges, says Byron Carlock, real estate practice leader at PwC.Speaking on the REIT Report, Carlock said that the current sentiment is one of cautious optimism. “Demand on the street from any of the product types is still quite good, especially multifamily, industrial, even the hotel sector. And frankly, retail is picking up again.”Carlock discussed the sectors highlighted in PwC’s Emerging Trends in Real Estate 2023 report that are likely to be most insulated from economic uncertainty. Industrial was in first place, followed by multifamily. “Affordability of home ownership continues to suffer, so we’re moving to a greater renter orientation in our population,” he said.

The REIT industry is likely to see additional gains in GRESB performance in the years ahead, given that a number of listed REITs appeared in the benchmark for the first time this past year, says Dan Winters, senior director at GRESB.Speaking on the REIT Report, Winters noted that in general, GRESB scores start to ramp up in year two and year three, “so I'm really expecting some additional increases in the REIT score in the years ahead.”Winters also discussed how a flight to quality real estate assets is likely to characterize the next several years, with companies needing to offer a superior investment and occupant experience to maintain competitiveness.Winters said that achieving those aims requires “a solid ESG program that's continuing to advance.” He added that the biggest threat to ESG is inertia, but that in the current economic climate the real estate industry is more likely to accelerate ESG-oriented efforts than pull back.

A growing need for more mid-market affordable housing, particularly in its targeted Sun Belt markets, has Elme Communities (NYSE: ELME), formerly WashREIT, anticipating its strongest growth in 20 years, says President and CEO Paul McDermott.“That mid-market renter is really the deepest part of the demand curve, and we only see that curve growing,” McDermott told the REIT Report. While acknowledging the current volatile interest rate climate, he added that it doesn’t “erase the fact that there is a significant need for more affordable homes, especially in the markets that we're targeting, and in that particular rental band cohort that we're targeting also.”Elme has been fully focused on multifamily since completing the sale of retail and office assets in 2021, although the REIT started messaging its intent to focus on multifamily back in 2016.McDermott noted that households making between $35,000 and $75,000 comprise over a third of rental households in its targeted Sun Belt markets. However, the share of new product delivering into those markets since 2018 that's affordable to households making around $60,000 is 2% or less, he added.