Institutional Real Estate, Inc. (IREI), in collaboration with Nareit, hosted a July 16 webinar addressing the latest trends in the real estate investment landscape. John Worth, representing Nareit, and Rick Romano, from PGIM, shared their expertise on the performance of REITs in the second quarter of 2024. Mike Consol, editor of Real Assets Adviser at IREI, moderated the panel.
John Worth, EVP of research and investor outreach at Nareit, noted that although REITs’ stock returns in the second quarter were “lackluster,” he was optimistic about their performance in the coming months, stating that the FTSE Nareit All Equity REITs Index posted 4.8% total returns, quarter to date.
“Even though REITs posted strong operational performance [in the second quarter], a lot of stock returns have been continued to be driven by the rate environment,” said Worth. Looking at the third quarter, people are a little more hopeful about a September rate cut, which is already being reflected in the stronger stock returns, he noted.
Rick Romano, managing director at PGIM real estate and head of the global real estate securities business, echoed Worth’s sentiments about how macroeconomic factors weighed on the industry’s Q2 total returns, but explained that the picture looks different when analyzing different sectors. “Health care and residential were very strong for the quarter,” noted Romano, mainly because of strong fundamentals combined with demographic and leasing trends he explained. Looking forward to the next 12-24 months, Romano discussed why data centers and senior living were best positioned for growth, explaining that both sectors have incredible demand and limited supply for a variety of reasons that are unique to each sector.
Asked about “red or yellow flags” across the industry, Romano said that “We’re finding opportunities within a lot of property types right now…Office was down, but we found an office company that was up…so there is a lot of dispersion within property types right now. I don’t think that there is a whole lot of red. Maybe some yellows where we’re cautious and looking for that to turn green—areas like self-storage and apartments, where we’re looking for a little bit better fundamentals for the second half of the year and going into 2025.”
Both panelists discussed REITs’ strong balance sheets and well-structured debt, the access to capital that those give them, and the resulting advantages that REITs have in this market, particularly in relation to private real estate. “REITs are ready to go out and play offense and look for distressed opportunities that may be coming out of the private side….and I think a lot of management teams are saying the time is now to get a bit more active with external acquisition growth,” said Romano.
Delving a bit more into public and private real estate performance, Consul asked Worth to talk about new research by CEM Benchmarking, showing that REIT active management adds net value to commercial real estate (CRE) portfolios. Worth emphasized a key finding from the study: after fees, actively managed REITs outperform private real estate. He explained that before fees, REITs and private real estate add value, but after fees, the “net returns are quite different. REITs continue to generate alpha—32 basis points—but private real estate, because of fee drag, generates negative alpha—negative 68 basis points.”
The discussion also touched on several other topics, including the outlook for student housing, the prevalence of strong operators within the health care sector, prospective advice for graduate real estate students, and ended with Worth noting four key mega trends that he is seeing in the global publicly traded REIT industry, specifically: the adoption of emerging property sectors, an increasing focus on specialization, a desire for greater scale, and the importance of sustainability.
The next Nareit/IREI quarterly webinar on the performance of the FTSE Nareit index series will take place October 8 at 1:00 pm (ET).
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