After a slow start in the first two months of 2022, the FTSE Nareit All Equity REITs index rose 7.07 percent in March. As a result, total returns year-to-date were down 5.26 percent—up from a month ago when year-to-date returns were -11.52 percent.
Every overall property sector posted gains for the month, lead by healthcare REITs up 11.89 percent, cell tower REITs up 11.50 percent and self storage REITs up 10.22 percent. The only sub-sectors that finished in negative territory for the month were regional mall REITs, down 2.78 percent, manufactured homes, down 0.26 percent, and timber REITs, which were down 1.17 percent.
WMRE sat down with Nareit Executive Vice President and Economist John Worth to discuss the March return figures.
This interview has been edited for style, length and clarity.
WMRE: The numbers for March were substantially better than for January and February. Can you talk about what drove the reversal?
John Worth: The first quarter of 2022 overall was marked by a slow start for REITs along with the broader stock market, but it had a really fast finish. The all equity REIT index ended March down just 5.26 percent. And as of the end of the day 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 potential economic slowdown and geopolitical turmoil created by Russia’s invasion of Ukraine created a downdrift that REITs got caught up in. In March, we saw some separation between REIT performance and the broader stock market.
If you think through those drivers, in terms of geopolitical risk, REITs have a domestic focus and limited supply chain exposure. So they tend to hold up better in periods like this. Similarly, if you think think about inflation, we know that REITs and real estate in general have been strong performers and resilient in periods of inflation. Interest rates and widening spreads can be tough for real estate generally, but we have seen that generally REITs have performed well during those times as well. And specifically today REITs are positioned well, having lowered leverage levels, reduced interest rate expenses as share of NOI and increased the tenure of their debt. Right now the average tenure is almost 8 years, lowering interest rate risk.
WMRE: In addition to those factors, were there any specific property-level dynamics that boosted any of the sectors?
John Worth: The stronger performers were healthcare, infrastructure and self storage—all up double digits. Infrastructure had been one of weaker performers for the year and had a bounceback month. Meanwhile healthcare had been doing OK and the strong month turned it positive now year-to-date. And self-storage is now down just 2 percent for the year.
When you look at year-to-date performance, one of things that stands out is that the strongest performers are lodging/resorts (up 6.9 percent), healthcare (up 5.4 percent) and office (up 2.7 percent). That’s a bit of a reversion of a pattern we saw over the entirety of the COVID period. The three sectors were hit hard by social distancing and office REITs had seen muted returns through 2020 and into 2021 reflecting investor concerns about the future of offices and the impact of work-from-home on long-term occupancies and capital expenditure needs. We are starting to see a more of an optimistic view with more companies providing encouragement and expressing sentiments about the need to get employees together. Many are not necessarily saying five days a week, but want employees in offices for meaningful amounts of time.
WMRE: It does seem like after some false starts that the push to return to office has finally gained some steam.
John Worth: One of things people are experiencing is that when they get colleagues back together, all those spontaneous interactions that can take place in offices mean projects are reemerging, new solutions to problems are discussed and lingering projects can get wrapped up. You realize that it’s by design. This is what offices do. The way you bounce ideas off someone in the coffee room and realize you need to talk to them when perhaps you hadn’t thought about doing that in a formal meeting. That’s why these offices as institutions have evolved. It is that planned spontaneity. If you bounce off enough people you will also increase information flow. As you experience that, people will be reminded of how important it is. You can do virtual life for a while, but you’ve got to get people in places where they can experience some randomness. That actually matters for how institutions evolve.
WMRE: Nareit just released its annual ESG dashboard. Can you talk about some of what you found with that?
John Worth: This is our fifth year building the dashboard. We look at the 100 largest REITs by market cap. This year all 100 are reporting on ESG publicly. Back in 2017 we had 60 of top 100 largest reporting, including 80 of those putting together standalone sustainability reports.
WMRE: Does this put REITs in a good position relative to the proposed SEC reporting guidelines on climate impacts?
John Worth: There remain some question marks on that. For now, it is only a proposed rule and there is a period for comment. There’s a lot of uncertainty on where it will land. So, it’s something that will take some time to get our heads around.
But it’s certainly true that REITs have embraced ESG reporting and have made tremendous strides 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. That is up from the 30 percent range just a few years ago. So, we’ve seen a lot of progress.