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Investors Sold REITs in Response to the Banking Crisis. They May Have Overreacted.
“We are less focused on the risks to REITs and more focused on where private market property valuations are going,” says Cohen & Steers’ Rich Hill.
The recent collapse of Silicon Valley Bank has had a knock-on effect on the value of real estate investment trusts. But real estate experts believe that the banking crisis isn’t likely to result in long-term problems for the REITs market.
REITs, which are companies that own and operate income-generating real estate properties, fell 8.3 percent in the two weeks following the March 10 demise of Silicon Valley Bank, as measured by the MSCI U.S. REIT Index. The performance of office REITs was even worse. SL Green Realty and Boston Properties, two big office REITs, declined by 33 percent and 18 percent, respectively, over the same period.
REITs, many of which own office buildings that have declined in value since the pandemic, are now facing lenders with lower appetites for risk.
“I think there’s a public perception that REITs are highly levered vehicles, have a lot of debt coming due, and don’t have a lot of funding sources away from commercial mortgages,” Rich Hill, head of real estate strategy and research at Cohen & Steers, told II. “When you take these things in totality, it would stand to reason that if they were true, REITs should be under pressure.”
But the REIT market is more robust than many investors think. Cohen & Steers estimates that office is less than 20 percent of the $20 trillion in commercial real estate. Office REITs are less than 4 percent of the total REIT market cap. “I think it’s fair for the market to be scrutinizing office REITs, but I think selling REITs just because of that is misguided,” he said.
In addition, the REIT market is less levered than it was during the global financial crisis. The average loan-to-value ratio of a REIT is around 33 percent, down from the peak of 38 percent in 2008, according to Hill. “REITs actually have a pretty conservative balance sheet. They learned some hard lessons during the GFC,” he said. “They have staggered maturity schedules, as well. On average, their debt usually doesn’t come due for about six years.”
Todd Briddell, CEO of real estate investment manager CenterSquare, thinks that the recent selloff in the REIT market is driven by panic. Investors who need to derisk their portfolios are selling REITs because they can, according to Briddell. Unlike stakes in private real estate funds, REITs are stocks that can be sold at any time. But he believes that investors who unload REITs because they are an easy source of liquidity are locking in long-term losses.
Both Hill and Briddell believe REITs are healthier than private real estate.
“Prior to this rate-tightening cycle, the REIT market had substantially lower leverage than the private real estate market,” Briddell said. “A lot of transactions took place at a time when rates were low and credit availability was high. [But REITs] haven’t been participating as big acquirers of assets for a number of years, [so] they’re in a very different position.”
Cohen & Steers expects private real estate valuations to come down 20 percent to 25 percent in 2023, according to its latest commercial real estate report. REITs, on the other hand, have already priced in the weakness.
“We are less focused on the risks to REITs and more focused on where private market property valuations are going,” Hill said.