Publicly traded REITs had a strong December to close 2021 with total returns of more than 40 percent for the year. And while some of those gains can be attributed to a recovery from the depths of the pandemic, total REIT returns have also increased compared to pre-pandemic times.
Overall, the FTSE Nareit All Equity REITs Index rose by 41.3 percent in 2021 – the best single annual profit since 1976.
WMRE sat with Nareit Executive Vice President and Economist John Worth to discuss December and full year returns.
This interview has been edited for length, style and clarity.
WMRE: Can you put the years into perspective for us?
John Wort: It underscores the story we’ve talked about several times in terms of the strength of the rebound. If we look at REITs over the entire COVID period from late February 2020 to December 31, 2021, all equity REITs are up 25 percent. REITs entered the crisis well prepared with reduced leverage. They were ready to be resilient in the early stages of the crisis and were able to achieve productive growth from November 2020 through the end of 2021.
If we look from this period – November 2020 to the end of 2021 – every sector has grown very strongly. That was the story of 2021, where we got every sector up by double digits. The lowest annual return of any sector was recorded in healthcare, which is still up 16 percent. If the lowest sector is up 16 percent, it’s a very good year.
WMRE: What were the highlights in December itself?
John Wort: December was strong – up 9.6 percent. Returns were broad-based. The industry in December led to the front runners with 13.4 percent. But it was also strong on lodging and resort revenues, as well as infrastructure / cell towers. In a way, investors caught up on the strong operating performance we’ve seen all year and built positive expectations for returns in 2022.
WMRE: At the property level, what stood out in terms of total annual returns?
John Wort: Regional mall REITs grew 92 percent over the year, which is an incredible achievement. And throughout the COVID period, including the depth of the negative results, regional malls rose 22.5 percent. It really is an impressive feat, and suggests that the 2021 performance was more than just a return to pre-COVID levels. Regional REIT share prices are significantly higher than pre-COVID prices.
The other sector that stands out is self-storage, which grew 79.4 percent over the year. Throughout the entire COVID period, self-storage REITs rose 91.2 percent.
And residential REITs grew 58 percent in 2021, led by residential REITs by more than 63 percent. Even with changes in work patterns, there is still a demand for CBD / urban apartment living. There is also increasing demand for apartment buildings in the Sun Belt suburbs. The general fundamentals in support of housing shortage are extremely strong.
Industry / logistics also grew by 62 percent over the course of the year. This built on long-term demand for industrial space to facilitate e-commerce. And we have seen that infrastructure / data centers had good years in historical comparison with a plus of 34.4 percent and 25.5 percent respectively.
The other sector that a lot of people pay attention to is the office. Office REITs grew by 22 percent over the course of the year. Over the entire COVID period, they have decreased by 4 percent. This underscores the risks to the prospects for the space. What is the future of the office both in the short term and in terms of employee return? And what is the new form of work in the long term and what does that mean for the demand for office space?
WMRE: We have a week in the year 2022 and are now counting on the omicron wave. Are there any implications for REIT returns?
John Wort: What has dominated valuations in January so far is interest-driven rather than omikron-driven. These two things are difficult to unravel. But the one big move we saw seemed more responsive to changes in interest rate expectations than anything that was being driven by that wave. Regarding omicron, where you would expect this would be accommodations / resorts and offices. As of yesterday, office activity had actually increased for the year and accommodations / resorts were only down 50 basis points. The broader market was down 3.6 percent, so none of that is noticeable.
I think there’s an omicron built in there, but more importantly, it’s an interest rate response. That’s something we see over time. REIT investors often react negatively to rising interest rates in the short term. But over longer periods of time, REITs tend to generate positive returns 85 percent of the time, and outperform the S&P 500 in half of the times during periods of rising interest rates.
WMRE: Any other issues when 2022 starts?
John Wort: At the end of the year, we published a new study by Timothy Riddiough of the University of Wisconsin that examined the nature and structure of the cell tower industry. It raised the question of whether cell towers are real estate in and of themselves. The answer is, «Yes, they are.» They are permanent structures that are attached to land. And their return properties characterize them as real estate.
The research also examined markets and found that cell tower REITs operate in highly competitive markets where they increase allocation efficiency and provide many benefits to consumers. They developed this model in which competing wireless service providers can group their devices on top of shared towers. It creates entry opportunities and reduces environmental pollution. It benefits customers and ultimately consumers who use cell towers.
WMRE: Any thoughts on what we might see with the capital markets?
John Wort: Until the third quarter of 2021, the topic was REITs with a balanced equity and debt capital strategy. The split was pretty much 50/50. A lot of capital has been raised and I expect this will continue until 2022. REIT ratings are strong. This creates the opportunity to raise capital.
WMRE: 40 percent year-on-year returns for the sector are difficult to track. What are realistic expectations for 2022?
John Wort: In the past, REITs have achieved an average return of around 12 percent. 2021 was an unusual year, driven by a recovery. Nobody will stand up and say we’ll have a 40 percent return for two years in a row. But a meaningful derailment of REIT performance is also not in sight. Next, you need to pay attention to the annual results. And the FFO is expected to see a stronger rebound towards the end of the year and several sectors to show very strong performances for the year. I think we should see another year of strong performance and that will drive valuations.