WASHINGTON, D.C.(Aug. 15, 2024) – New data from the second quarter of 2024 show that REITs continue to have solid fundamentals, with 3.5% year-over-year growth in net operating income (NOI) and healthy balance sheets, according to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today.
Second quarter data illustrate how REIT balance sheets continue to be characterized by well-structured debt—79.2% of REITs’ total debt was unsecured, while 90.8% of listed REITs’ total debt was at a fixed rate. In addition, on average:
- Leverage ratios were low with debt-to-market assets at 34.1%.
- Weighted average term to maturity of REIT debt was 6.4 years.
- Weighted average interest rate on total debt was 4.1%.
“Historically, REITs have outperformed at the end of Fed tightening cycles, and second quarter data underscore that REITs are well-positioned for potential rate cuts next month or later in the year,” said Nareit Executive Vice President of Research & Investor Outreach John Worth.
Year-Over-Year Increases in NOI Illustrate REITs’ Sound Fundamentals
Tracker data demonstrate that REITs displayed sound fundamentals during the second quarter. Specifically:
- NOI was $29.7 billion—a 3.5% rise from one year ago.
- Same Store NOIexperienced 3.0% year-over-year gains, demonstrating that REITs are keeping pace with inflation.
In addition, 63.9% of REITs reported having year-over-year increases in NOI.
Quarterly FFO Increases, with Year-Over-Year Remaining Relatively Steady
At the industry level, funds from operations (FFO) for all equity REITs was $20.2 billion, representing a gain of 8.5% quarter-over-quarter and a modest loss of 0.9% year-over-year.
Despite posting positive quarterly FFO growth and the third highest quarterly FFO on record for the sector, industrial FFO was down on a year-over-year basis, reflecting a decline from the unusually high FFO in the second quarter of 2023. This decline contributed to the industry’s modest year-over-year FFO loss, which is not broadly representative of the industry’s health.
In fact, many sectors saw significant increases in growth when compared to the second quarter of last year, including:
- Office, which rose 15.8%.
- Data centers, which rose 15.3%.
- Gaming, which rose 11.4%.
- Self-Storage, which rose 9.4%.
- Retail, which rose 6.0%.
Notably, 63.2% of REITs reported having year-over-year increases in FFO.
Implied Cap Rates Show Public-Private Real Estate Divergence Could Continue into 2025
Nareit has written extensively about the divergence between public and private real estate market valuations , using differences in capitalization (cap) rates to help demonstrate this gap.
The latest T-Tracker data show that the REIT implied cap rate was 6.0% in the second quarter, which was 129 basis points higher than the private market appraisal cap rate. All else equal, this continuing divergence suggests that REITs offer an attractive entry point into commercial real estate.
“The valuation readjustment process could stretch into 2025, because progress remains slow,” said Nareit Senior Vice President of Research Edward Pierzak. “In the face of this divergence and the expectation that the Federal Open Markets Committee will cut rates in the near future, public equity REITs are increasingly appealing, particularly when you consider their solid balance sheets and sound fundamentals.”
For more data, please read the complete 2024 Q2 Nareit T-Tracker report.