Third quarter REIT performance, sector outlooks, and the closing gap between public and private real estate valuations took center stage during the “FTSE Nareit U.S. Real Estate Indexes in Review and What’s Next” webinar.
Hosted by Nareit and Institutional Real Estate, Inc. (IREI), the quarterly webinar took place Oct. 8 and featured John Worth, executive vice president of Research & Investor Outreach at Nareit, and Jason Yablon, executive vice president and head of listed real estate at Cohen & Steers. Mike Consul, senior editor of IREI’s Real Asset Adviser magazine, moderated the discussion.
The webinar started with Worth giving an overview of REIT performance during the third quarter, which was followed by a lively conversation that was also shaped by questions from the audience. The webinar included key observations about:
- Total returns performance. REITs had a strong third quarter with the FTSE Nareit All Equity Index posting total returns of 16.75%, Worth said.
- Sector returns. Office was the best performing property sector for the quarter, with total returns of 29%. Specialty (26%) and self-storage (21%) were the second and third best performing sectors for the quarter, Worth added.
- Though there has been a slowing pace of earnings, they have been generally positive; REIT funds from operations have been relatively flat on a year-to-date basis, while net operating income has been positive. As the prospect of a soft landing increases, there is a higher likelihood of earnings increasing in 2025 and 2026, Worth noted.
- Health Care. Health care fundamentals are extremely healthy because better than average demand is combining with less than average supply, resulting in occupancy growth and pricing power, Yablon said.
- Self-Storage. The Federal Reserve’s rate cut helped boost self-storage’s performance in the third quarter and could bode well for strengthening performance over the next 12 months. During the past few quarters, a lack of churn in the housing market negatively affected demand for self-storage, leading to lower rents and weaker growth. More rate cuts, however, will theoretically make it easier for people to move, which could accelerate demand for self-storage during the next year, Yablon explained.
- Yablon noted that Cohen & Steers thinks that “cell towers are a great place to be right now.” In the long term, there is limited supply and good demand. “It’s not easy to build cell towers in the United States and people are going to keep using their phones,” he explained. In the short term, new leasing activity is positively affecting fundamentals, valuations are cheap, and rate cuts are beneficial for the sector, he observed.
- In response to a question about value proposition, Yablon cautioned that office cap rates need to drop from where they are for office to have good value proposition. Both Worth and Yablon agreed though that the super prime assets in REIT portfolios are doing well, with Yablon highlighting that REIT office portfolios are much better than the average office portfolio.
The webinar closed with Yablon and Worth discussing different factors and forces that could increase REIT valuations. Yablon noted two. The first is a lack of supply, which he believes will hit the market in mid-2025 or early 2026, which will positively affect fundamentals and valuations. The second is an increase in transaction activity. Worth added a third, explaining that as transaction markets open, REITs will more likely be buyers than sellers, which will lead to accretive growth. Their sound balance sheets and access to unsecured debt will enable REITs to choose which deals they want to make, which is a great recipe for growth, he said.
The next webinar will be Jan. 14, 2025, and it will analyze fourth quarter performance of the FTSE Nareit U.S. Real Estate Indexes. Sign up to receive updates about that webinar, other events, and research.
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