Market Insights
Tuesday, February 27, 2024
Global REITs struggled to keep up with the broader market for much of 2023, weighed down by elevated interest rates and a slew of bank failures. However, REIT share prices surged in the final quarter of the year, as Central Banks began pivoting on rate rhetoric. Heading into 2024, REITs continue to demonstrate attractive fundamentals and valuations, and we believe seven key themes will shape the sector and unlock opportunities for investors in the year ahead.
#1: Improved Access to Capital for REITs
2023 saw several large, private real estate funds gate their redemptions, leaving investors unable to access their capital. A number of REITs, conversely, were able to successfully tap the market for equity throughout the year – in Europe, Japan, and the US. This demonstrates that capital remains readily available for REITs.
We are also seeing debt availability for REITs. Although financing has been a challenge for commercial real estate in general, public REITs have had access to the debt market through banks or public bonds. What’s more, pricing for that debt has been generally more favorable than in private markets, which we believe is largely due to REITs’ transparency, quality, scale, and diversified platforms.
#2. REITs Capturing Market Share
In recent years, the largest real estate transactions have been dominated by the private sector. Case in point, in 2021, virtually all major real estate transactions were executed by private investors. In contrast, in 2023, REITs participated in more than half of the major real estate transactions throughout the year. With improved access to capital at more attractive financing terms, REITs are re-gaining market share and going on the offensive. Looking ahead, we believe REITs are well positioned to continue to grow externally and capture presence in the market.
#3. REIT M&A Accelerating
Despite challenging market conditions, 2022 and 2023 saw continued levels of REIT M&A activity, and we expect that activity to accelerate throughout 2024 and beyond. A number of transactions in recent months have signaled that REIT M&A is very much alive and well – most notably, Blackstone Real Estate, together with Blackstone REIT, acquiring Tricon Residential – a Canadian owner and operator of US single family and multifamily rentals – at a 30% premium to Tricon’s share price.
In our view, a number of large funds have raised equity capital over the last several years and are now looking to deploy that capital into the market. REITs can be a cost-efficient portfolio acquisition opportunity for these funds, providing both scale and value. These transactions also provide the market with price discovery, and Blackstone’s recent acquisition of Tricon at a 30% premium to its share price demonstrates the value investors see in the REIT space.
#4. Alternative Real Estate Sectors Gaining Ground
In private markets, most investment activity occurs within four main “food groups”: residential, office, retail, and industrial. On the listed side, however, we’ve observed the rise and growth of alternative sectors and subsectors, such as single-family rental, manufactured housing, self-storage, cell towers, and data centers.
These alternative sectors often require operating platforms, making it challenging for private investors to gain entry and scale. REITs, however, provide a pathway for private investors to gain access to an operating platform in these niche sectors. What’s more, fundamentals in these alternative sectors have been, and continue to be, favorable and resilient to changes to the economy. We believe in 2024, private investors will be looking increasingly for opportunities in these alternative sectors – and will be looking to REITs as the gateway.
#5. Multifamily: A Mixed Bag
We believe being selective will be key to unlocking value in multifamily in 2024. In Canada, for example, we believe the multifamily sector presents significant opportunity, supported by macro tailwinds such as rapid population growth and limited new supply, which is constrained by elevated financing costs. Further, Canada’s widespread rent control policies are keeping in-place rents well below market, generating a significant uplift when tenants turnover.
In contrast, the Sunbelt region of the US, which is a lower barrier to entry market, saw a surge in development activity in recent years, with cheap financing readily available for developers. Now, as debt costs have risen and these projects are nearing completion, many developers are scrambling to lease vacancies, offering discounted rents to kickstart their cashflows. Throughout 2024, picking the right regions and subsectors will be critical to success in multifamily investing.
#6. Logistics Sector Still Healthy
We believe fundamentals remain strong in the global logistics sector. A combination of onshoring and healthy growth in manufacturing and e-commerce are driving continued demand for modern, well-located logistics assets. On the other side, supply of new logistics assets has diminished as financing costs for new developments have risen rapidly.
Although there has been chatter that the logistics sector is slowing, we believe it will remain healthy because of slowing supply, coupled with in-place rents that are well below market. Even in markets where rents are flat or decreasing year-over-year, we are still seeing positive double-digit leasing spreads on new deals and renewals as compared to in place rents, driving strong cash flow growth.
#7. Technology’s Time To Shine
In 2024, we believe we will continue to see growth in innovation industries such as artificial intelligence, 5G deployment, and science and medicine. In our view, REITs focused on these innovative industries, such as data centers, cell towers, and life sciences, will be well positioned to benefit from these trends, giving REIT investors plenty of innovation related options.
