The FTSE Nereit All Equity REIT Index rose 7.07 per cent in March after a slow start in the first two months of 2022. As a result, the year-on-year total return was lower at 5.26 per cent — a month earlier when the year-on-year return was -11.52 per cent.
Each overall property sector posted gains for the month, led by health care REITs by 11.89 percent, cell tower REITs by 11.50 percent and self-storage REITs up 10.22 percent. The only sub-sectors that ended in negative territory for the month were regional mall REITs, down 2.78 percent, manufactured homes, down 0.26 percent, and lumber REITs, down 1.17 percent.
WMRE sat down with Nareit’s executive vice president and economist John Worth to discuss the March return figures.
This interview has been edited for style, length and clarity.
WMRE: March’s numbers were much better than January and February. Can you talk about who did the reversal?
John Worth: Overall, the first quarter of 2022 was marked by a slow start for REITs with a broader market share, but it actually ended fast. The All Equity REIT Index, which ended March, is down just 5.26 per cent. And by the end of the day on Thursday (April 7), it was now down just 3.8 percent, putting it ahead of the broader stock market.
In the early part of the year, investor concerns about inflation, interest rates, a possible economic downturn and the geopolitical turmoil resulting from Russia’s invasion of Ukraine created a downdrift in which REITs were caught. In March, we saw some separation between the performance of REITs and the broader stock market.
If you think through those drivers, REITs have a domestic focus and limited supply chain risk, in terms of geopolitical risk. Hence they hold better in such periods. Similarly, if you think about inflation, we know that REITs and real estate in general have been strong and resilient in periods of inflation. Interest rates and wide spreads can be tough for real estate in general, but we’ve seen REITs in general have performed well during that time as well. And REITs in particular are well positioned today, with lower leverage levels, reduced interest rate expenses as part of NOI, and increased tenure of their loans. Right now the average tenure is around 8 years, thereby reducing the interest rate risk.
WMRE: Aside from those factors, were there any specific asset-level dynamics that fueled either sector?
John Worth: Strong performers were healthcare, infrastructure and storage itself — all in the double digits. Infrastructure had been one of the underperformers for the year and had a booming month. Meanwhile healthcare was doing well and a strong month turned it year-on-year positive. And self-storage is now down just 2 percent for the year.
Best of all, when you look at year-over-year performance, the strongest performers are lodging/resorts (up 6.9 percent), healthcare (up 5.4 percent) and offices (up 2.7 percent). This is a slight reversal of the pattern we saw throughout the post-COVID period. Three sectors were hit hard by social distancing and office REITs had seen muted returns through 2020 and into 2021, fueled by investor concerns about the future of offices and work-from-home needs for long-term occupancy and capital expenditure. shows the effect. We are starting to see a more optimistic outlook and more companies are providing incentives and expressing sentiments about the need to bring employees closer together. Many people aren’t saying five days a week is necessary, but want employees in offices for meaningful time off.
WMRE: Looks like the push to get back to the office after a few false starts has finally gained some steam.
John Worth: One of the things people seem to be experiencing is that when they bring coworkers back together, all those spontaneous conversations that can happen in offices means that projects are starting again, New solutions to problems are being discussed and pending projects can be wrapped up. You understand that this is by design. That’s what offices do. The way you bounce off someone’s thoughts in the coffee room and realize you need to talk to them is when you probably didn’t think to do so in a formal meeting. This is the reason why these offices have evolved as institutions. This is that planned spontaneity. If you bounce off enough people you’ll also increase the information flow. As you experience, people will be reminded how important this is. You can do virtual life for a while, but you have to get people into places where they can experience some randomness. What really matters is how institutions develop.
WMRE:NEREIT has just released its annual ESG Dashboard. Can you talk about some of what you got with it?
John Worth: This is our fifth year of building the dashboard. We look at the 100 largest REITs by market cap. All 100 are reporting publicly on ESG this year. Back in 2017 we had 60 of the top 100 greatest reporting, 80 of which put together a standalone sustainability report.
WMREQ: Does this position REITs well relative to proposed SEC reporting guidelines on climate impacts?
John Worth: There are some question marks on this. For now, this is only a proposed rule and there is a period for comment. There is a lot of uncertainty over where this will land. So, this is something that will take some time to get over our heads.
But it is certainly true that REITs have adopted ESG reporting and have made tremendous progress in terms of quantity and quality and depth of reporting. Overall, 64 percent of the top 100 by equity market cap are reporting carbon targets and 67 percent are reporting sustainability goals. This is up from the 30 per cent mark a few years back. So, we’ve seen a lot of progress.