It has been a tough year to be a Real Estate Investment Trusts. Between the beginning of 2022 and December 2023, REIT share prices fell 21.4 percent, according to the National Association of Real Estate Investment Trusts (Nareit). Popular non-traded REITs, including those from Blackstone and Brookfield, posted annual performances that were some of their worst on record, and redemption rates soared. But the latest outlooks from industry experts, driven by the expectation that the Fed will deliver an interest rate cut later this year, are hopeful that a comeback is ahead for the REIT market.
One of the hottest investment areas in recent years has been non-traded REITs. The buzzy segment gives individual investors the ability to take part in the skyrocketing property values of multifamily, industrial, and other kinds of commercial real estate assets. Because these REITs are not traded on public stock exchanges, they aren’t subject to the same regulatory oversight and reporting requirements as public REITs, which can offer more flexibility in terms of investment strategies. They are also popular among investors because they pay high dividends and potentially have a lower overall tax liability. REITs are structured as pass-through entities, so they do not pay federal income tax at the corporate level. As a result, income and deductions flow to the individual investors in the REIT. For private REITs, the depreciation from the REIT can be passed to individual shareholders, allowing investors to offset their income with the depreciation tax deduction. Additionally, nontraded REIT investors can achieve long-term capital gains if an asset is held for a certain period of time.
There’s a marked difference in valuation between the public and private REIT segments. Public REITs are valued at the amount their shares are trading for on the stock market, while non-traded REITs are valued on a monthly basis by their sponsors working with independent appraisers who analyze the worth of the commercial properties they own. Values of private REIT shares have dropped by a much smaller amount than shares of many public REITs in the last few years, which has led to concerns over whether non-traded REITs overvalue their properties. That, in turn, has led some to believe that the low fundraising and high redemption request figures among non-traded REITs are being caused in part by REITs not reducing the value of their shares enough. “There’s skepticism by investors that those values are fully reflective of the price changes,” said Kevin Gannon, CEO and Chairman of Robert A. Stanger & Co.
The largest REITs in the sector, like Blackstone Real Estate Income Trust (BREIT), Starwood Real Estate Income Trust, and Brookfield REIT, have grown rapidly since their creation but have not been immune to continued interest rate hikes and worsening economic conditions. Non-traded REITs raised $9.8 billion between January and November 2023, a major slowdown from all of 2022, when $33.2 billion was raised, according to The Wall Street Journal. Redemptions soared in the first three quarters of 2023, with investors redeeming about $17.4 billion, outpacing the $12 billion redeemed in 2022.
In December 2022, Blackstone said BREIT had reached its quarterly redemption limit due to a doubling in redemption requests the previous month, while subscriptions experienced a substantial drop-off to less than $500 million, down from $880 million just two months prior. BREIT, a fund for wealthy investors that primarily invests in stabilized income-generating commercial real estate in the U.S., reported a 0.5 percent loss in 2023, on the heels of a 1.2 percent monthly loss in December. The figure is a marked difference compared to the 10.6 percent average annual increase BREIT has posted since its inception in 2017, according to reports from the company.
Brookfield REIT, a similar fund for wealthy investors that invests in real estate properties across the spectrum, including logistics, office, and rental housing, reported a negative return of 6.7 percent in 2023, its first annual loss since launching in 2021. From a monthly perspective, the REIT posted more losses than gains. The figures are a considerable departure from returns posted between 2020 and 2022 when the REIT produced annual gains between 10 and 23 percent.
Brookfield REIT was created years after Starwood and Blackstone made waves with their own REITs, which have been the top-performing REITs in the nontraded space in terms of fundraising. Last year, as fundraising slowed across the segment, property values fell, and investor redemptions shot up, Brookfield REIT CEO Zach Vaughan stepped down. Vaughan, who was replaced by Brian Kingston from Brookfield Asset Management, had led the REIT as CEO since it was launched in late 2021.
Despite the shakiness in the non-traded REIT space, the overall REIT market experienced a surge in the fourth quarter of 2023, which many in the industry hope will continue into this year, especially given the potential for interest rate cuts sometime in 2024. “REITs historically have had impressive outperformance at the end of Fed tightening cycles, the public-private CRE valuation divergence will continue to close, and REITs are well positioned to navigate a prolonged period of high-interest rates,” Nareit researchers wrote in the organization’s 2024 REIT Outlook.
Consolidation, which was a trend in 2023, is expected to continue, according to Nareit’s 2024 REIT Outlook. Last year, seven public REIT-to-REIT mergers within the same property sector were announced, with a total deal value of $52.8 billion. The other notable trend from 2023 was the opportunity REITs created to invest in emerging real estate sectors. This was most seen last year in the rising demand for REIT data center space, a development spurred by the AI boom and the newly launched gaming real estate sector in the FTSE Nareit U.S. REIT indexes.