In late May, Nareit marked the passage of 15 months of financial market response to the global spread of COVID-19, social distancing measures, and more recently, here in the U.S., the reopening recovery.
As with any event that has such a broad and dramatic impact, compounded with the devastating losses of life and livelihoods occurring in this pandemic, the inevitable long-lasting changes—to society, the economy, commercial real estate and REITs—will only be understood over time.
It is important to take note of the REIT resilience through the crisis and their ongoing recovery. The year-to-date total return of the FTSE Nareit All Equity REITs index at the end of May was 18.1% and the index is 4.3% above its pre-pandemic high. Capital markets are open and we are observing growth oriented M&A transactions that reflect confidence in business models and the sector outlooks. Operationally, REIT earnings are recovering quickly, with aggregate FFO now at 85% of its pre-pandemic level.
In this midyear outlook, Nareit’s research team provides their perspectives on the past 15 months and a look ahead at the next 12 to 18 months. Nareit believes this will be a period of robust economic growth that will drive recovery across a broad range of real estate and REIT sectors. As Calvin Schnure notes, “a robust recovery is no longer a question of ‘if’, but rather, ‘when’.”
REITs are well positioned to take advantage of a growing economy because they entered the crisis with historically strong balance sheets and access to credit and liquidity. Nevertheless, uncertainties remain. Most critically, how will the future of office use evolve as firms return to the office and experiment with hybrid and work from home arrangements.
Another topic of widespread discussion is the potential threat of inflationary pressures as the economy reopens. Nicole Funari explains that recent inflationary signals reflect transitory items, and significant inflation fears may be premature or unfounded; nevertheless, REITs may perform well if inflation should increase. She finds that historically, REITs outperformed in periods of moderate and high inflation, while providing competitive returns in periods of low inflation.
A key lesson of the past 15 months is the continued digitization of the economy. As real estate has evolved to house the modern economy, REITs have been at the forefront of these changes. John Barwick reviews changes in the index composition over the past decade and discusses how Nareit is keeping pace by updating and expanding the index series it produces in partnership with FTSE Russell and EPRA.
Heading into the second half of 2022, Nareit is optimistic about the effect widespread vaccination in the U.S. is having in reducing COVID-19 cases, encouraging reopening and propelling economic growth.