December 6 2023
Market Commentary
November proved to be a rewarding month for real estate investors, with the GPR 250 REIT World Index delivering a substantial return of +10.4% in US dollars. The remarkable performance was fuelled by a confluence of factors that included lower than expected Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) figures, coupled with unexpectedly robust GDP growth.
These positive economic indicators not only contributed to the REIT sector's impressive gains but also stirred speculation about the potential for earlier-than-expected reductions in interest rates, adding a compelling dimension to the landscape for investors in the real estate market.
All sectors within the GPR 250 REIT World exhibited positive growth in US dollar terms, with Self-Storage (+15.0%) being the standout performer, experiencing a rebound in prices. This came after a prolonged period of underperformance, particularly in the US. Diversified (+13.6%) secured the second position, benefiting from a widespread increase in European, UK, and Australian stocks. Regional Malls (+13.3%) claimed the third spot, fuelled by a robust performance from Unibail-Rodamco-Westfield (URW), which delivered a remarkable +29.2% for the month.
Conversely, the sectors with the least impressive results, although still delivering absolute returns that would satisfy most investors in a single month, included Multifamily (+6.2%), Lodging (+6.9%), and Healthcare (+7.2%).
Regarding geographical performance in November, the leading regions comprised Spain (+22.0%), UK (+18.0%), and France (+17.0%), benefiting significantly from retail and diversified stocks. Conversely, the less favourable regions encompassed Japan (+4.2%), anchored by its low correlation with the rest of the world as interest rates appear to have reached their peak. South Africa (+7.2%) and Mexico (+8.3%) underperformed compared to other regions, following their leading positions in the previous month.
Realty Income’s entry into the data centre sector through a joint venture with Digital Realty reflects a strategic move to capitalize on the growing demand for data infrastructure. By investing $200 million for an 80% equity stake in two pre-leased data centres in Northern Virginia, Realty Income diversifies its portfolio and taps into the lucrative data centre market.
Partnering with Digital Realty, a major player in cloud- and carrier-neutral data centres, enhances Realty Income's position. The joint venture's flexibility to expand capacity up to 48 MW caters to potential future demands, highlighting a forward-looking approach to the evolving landscape.
In November, the Nareit REITWorld conference convened in Los Angeles, and delivered the following key takeaways across industrial, retail and office sectors.
Industrial
In the industrial sector, the overarching trend indicates a divergence in market rent growth between non-coastal and coastal regions, notably pronounced in the Sun Belt markets. This year, non-coastal markets are expected to outpace their coastal counterparts, reflecting shifting preferences towards onshoring and nearshoring trends. Southern California, particularly in the Inland Empire, faces a moderate decline of 5% to 10% in rents, with slight decreases observed in Los Angeles and Orange County. Despite these recent challenges, Southern California maintains the largest lease mark to market across REIT portfolios, underscoring its resilience.
Retail
The strip centre sector appears to have benefitted from a unique advantage stemming from a lack of new supply, positioning it favourably amid near all-time low vacancy rates and high tenant retention rates across the country. According to REIT management, the scarcity of construction loans and elevated construction costs contribute to a deterrent for new projects, potentially creating a substantial tailwind for existing strip centres. The confluence of these factors implies that strip centre rents may need to surge significantly—potentially by 50-100% in many markets—to justify new construction investments.
Office
Despite optimistic sentiments from office REITs regarding leasing pipelines surpassing early 2023 levels, the industry faces prolonged timeframes for lease execution. This extended process has translated into signed leasing volumes falling below 2022 levels. Notably, the dynamics of leasing activity reveal a trend where small and medium-sized tenants are the primary drivers, showcasing more agility in their decision-making.
In contrast, larger tenants exhibit a slower transaction pace, necessitating additional internal approvals and contributing to a reduction in space requirements. The complexities surrounding lease execution and shifting tenant behaviours underscore the continued turbulence in the office sector, requiring adaptive strategies to navigate the evolving landscape.
In Summary
November's substantial returns in the GPR 250 REIT World Index, propelled by positive economic indicators and speculation around interest rate reductions, signal a potential positive turn for the real estate sector. The unique advantages seen in the industrial and strip centre sectors, coupled with industry participants' optimism at the Nareit REITWorld conference, collectively suggest a resilient and evolving real estate landscape. While challenges persist, the potential for sustained growth underscore a positive trajectory for the global real estate industry.
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