According to new research from Nareit, around 168 million Americans, which is roughly 50% of all U.S. households, have some exposure to public real estate investment trusts (REITs). This ownership can come in the form of direct stock ownership or through mutual funds, ETFs, or target date funds that include REITs. These findings were generated by analyzing the Survey of Consumer Finances produced by the Federal Reserve.
Edward F. Pierzak, Nareit’s senior vice president of research, discussed the implications of these numbers and provided an update on the state of REIT balance sheets. Pierzak pointed out that there has been a substantial increase in equity ownership among Americans, with an increase from 15% in 2019 to 21% in 2022. He attributed this rise to the growing popularity of target date funds, through which typical Americans are gaining exposure to commercial real estate in their traditional retirement accounts.
When discussing the performance of REITs, Pierzak highlighted January’s results. While REIT total returns were slightly negative, data centers stood out with a 3.5% increase due to their active REIT investment managers taking overweight positions. Looking at a longer time frame, from mid-October to the end of January, REITs experienced a solid gain of 16.2% compared to the Russell 1000’s 14% gain.
Pierzak also addressed the gap between public and private real estate valuations. He explained that the difference between REIT implied cap rates and private real estate cap rates is still over 200 basis points. While a complete convergence is unlikely, there will likely be some convergence through REIT performance gains and writedowns on the private side.
In terms of interest rates and inflation, Pierzak emphasized that REITs have been keeping pace with inflation in terms of operational performance. However, the strength of these gains has been diminishing as inflation declines. Pierzak mentioned that this presents an opportunity for opportunistic acquisitions for REITs due to their access to capital.
Overall, Pierzak expressed optimism for REITs, highlighting their competitive advantage with a low weighted average cost of debt and a high percentage of fixed-rate and unsecured debt. He believes that REITs will continue to outperform private real estate, and while the transaction market may take some time to return to equilibrium, private market participants will eventually have to adjust their cap rates.
