Publicly-traded REITs rode a strong December to wrap up 2021 with total returns for the year up more than 40 percent. And while some of those gains stem from a recovery from the depths of pandemic, REIT total returns are also up relative to where they were pre-pandemic.
Overall, the FTSE Nareit All Equity REITs index was up 41.3 percent for 2021—the best single-year gain since 1976.
WMRE sat down 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 full year numbers into perspective for us?
John Worth: It underscores the story that we’ve talked about a number of times in terms of the strength of the recovery. When we look at REITs over the entirety of the COVID period, starting late Feb 2020 through Dec. 31, 2021, all equity REITs are up 25 percent. REITs came into the crisis well prepared with reduced leverage. They were prepared to be resilient throughout the early stages of the crisis and were able to have productive growth starting in November 2020 all the way through the end of 2021.
When we look from that timeframe—November 2020 to the end of 2021—every sector is up very significantly. That was the story of 2021, where we’ve got every sector up double digits. The lowest annual return for any sector was in healthcare, which was still up 16 percent. When the lowest sector is up 16 percent, it’s a very good year.
WMRE: In terms of December itself, what were the highlights?
John Worth: December was strong—up 9.6 percent. Returns were broad-based. December industrial led the way up 13.4 percent. But it was also strong for lodging and resorts returns and for infrastructure/cell towers. In a way, investors were catching up with the strong operating performance that we’ve seen throughout the year and building in positive expectations for 2022 returns.
WMRE: Drilling down to the property level, what stood out from the full-year returns?
John Worth: Regional mall REITs were up 92 percent for the year, which is an incredible performance. And over the entirety of the COVID period, including the depths of the negative results, regional malls are up 22.5 percent. It really is an impressive performance and suggests the performance in 2021 was more than just recovering back to pre-COVID levels. Regional REIT share prices are substantially higher than pre-COVID prices.
The other sector that stands out is self-storage, which was up 79.4 percent for the year. For the entire COVID period, self-storage REITs are up 91.2 percent.
And residential REITs were up 58 percent in 2021, led by apartment REITs up more than 63 percent. Even with changes with work patterns, there is still demand for CBD/urban apartment living. Plus, there is increased demand for Sun Belt suburban apartment buildings. The overall fundamentals supporting residential, with a housing shortage, are extremely strong.
Industrial/logistics was also up 62 percent for the year. That was building on the long-term story of demand for industrial space to facilitate e-commerce. And we saw infrastructure/data centers have good years by historical standards of up 34.4 percent and 25.5 percent respectively.
The other sector that a lot of people are paying attention to is office. Office REITs were up 22 percent for the year. Over the entire COVID period, they are down 4 percent. That is highlighting the risks to the outlook for the space. What is the future of office both near-term, in terms of when people come back? And over the longer term, what is the new shape of work and what does that mean for demand for office space?.
WMRE: We are a week into 2022 and now reckoning with the omicron wave. Is there any fallout from that in REIT returns?
John Worth: What has dominated valuations so far in January is more rate-driven than omicron driven. Those two things are difficult to disentangle. But the one big movement we saw appeared to be more in response to changes in rate expectations that anything that’s driven by this wave. With respect to omicron, where you would expect to see that would be in lodging/resorts and office. Through yesterday, office was actually up for the year and lodging/resorts are down just 50 basis points. The broader market was down 3.6 percent, so none of that stands out.
I think there’s some omicron built in there, but more significantly it is an interest rate reaction. That’s something we see over time. REIT investors often react negatively to rising rates in the short term. But over longer periods, REITs tend to have positive returns 85 percent of the time and beat S&P 500 half of the time during periods of rising rates.
WMRE: Any other themes as 2022 gets underway?
John Worth: Right at the end of the year we published a new study authored by Timothy Riddiough from the University of Wisconsin reviewing the nature and structure of the cell phone tower industry. It asked the question of whether cell towers are intrinsically real estate. The answer is that, “Yes, they are.” They are permanent structures affixed to land. And their return characteristics mark them as being real estate.
The research also looks into markets and found cell tower REITs operate in highly competitive markets where they are increasing allocation efficiency and providing a lot of benefit to consumers. They’ve created this model where competing mobile carriers can have their equipment sit together on shared towers. It creates options for entry and reduces the environmental impacts. It benefits customers and ultimately consumers who are using cellphone towers.
WMRE: Any thoughts on what we might see with capital markets?
John Worth: Through the third quarter of 2021, the theme was REITs employing a balanced equity and debt strategy. The breakdown was almost exactly 50/50. There was a lot of capital raising and I expect that to continue through 2022. REIT valuations are strong. That creates the opportunity to raise capital.
WMRE: Returns of 40 percent year-over-year for the sector is a hard act to follow. What are realistic expectations for 2022?
John Worth: REITs historically have returned an average of around 12 percent. 2021 was an unusual year driven by recovery. No one is going to get up and say we will have two years in a row of 40 percent returns. But there is also nothing on the horizon to meaningful derail REIT performance. The next thing to look to are full year results. And the expectation is that year-end FFO will show more recovery and several sectors posting very strong performances for the year. I think we should see another year of strong performance, and that will drive valuations.