Investors Looking To Seize On Depressed Property Valuations Create New Crop Of REITs

It may seem like an odd time to launch a new commercial property venture, with interest rates at a 22-year high and valuations of basically every property type dropping, but a fresh wave of nontraded REITs has arrived to take advantage of those very same conditions.

EQT Exeter, Invesco Real Estate, Sculptor Capital Management, ExchangeRight and BentallGreenOak all filed with the Securities and Exchange Commission within the last two months to launch nontraded REITs.

“Firms that are launching today are taking the long view,” Institute for Portfolio Alternatives CEO and President Anya Coverman said, speaking generally about nontraded REITs. “That's what real estate investors do — they're not looking to time the market based on a cycle.”

Many of these firms are swooping in now because they see valuations dropping, with further declines expected in the next year or so, Coverman said. 

In March, GreenStreet’s commercial property price index was down 15.2% compared to March 2022. During the 12 months ending in June, the index was down 11.6% compared to a year earlier. Those drops could create opportunities to buy quality assets at very attractive prices. 

“I think the capital that's been raised or is forming on the sidelines to invest in these nontraded REITs is sensing an opportunity,” Mizuho Securities Senior REIT Analyst Haendel St. Juste said. Not only are they seeing some asset values coming down slightly, they’re also anticipating, after this period of higher interest rates we are in, that there will be both more assets and lower prices available, perhaps creating more and greater opportunities for acquisitions over the next year or two.

Nontraded REITs in aggregate have produced a total return over the last five years of about 59%, whereas their traded counterparts have had returns in the mid-20% range over the same period, Robert A. Stanger & Co. CEO and Chairman Kevin Gannon said. That chasm shows in last year’s traded REIT creation: 2022 was the first year in two decades in which no companies filed to become a public real estate investment trust, Bisnow previously reported.

Gannon said a factor in their success has been that many nontraded REITs tended to focus on multifamily and industrial assets whereas the traded REITs were often more diverse portfolios, including asset types that are struggling today. 

“The performance has been extraordinary because of the asset class focus,” Gannon said.

But this year’s crop is focusing on other property types as they seek the best deals. One new nontraded REIT launched by Pasadena, California-based ExchangeRight earlier this year is focusing on a few specific subsets of retail. 

The REIT is targeting what it refers to as necessity retail — triple-net leased properties with tenants such as Kroger grocery stores, Walgreens, healthcare providers like dialysis clinics, retailers like Hobby Lobby and even Tractor Supply. This isn’t a response to the current moment so much as it is ExchangeRight sticking with what works, Warren said. The company has been buying net-leased assets for around a decade and of the roughly 1,200 net-leased assets ExchangeRight owns, none have a missed rent payment. 

“This is the boring asset class, and that's OK,” ExchangeRight founder Warren Thomas said, adding his investors are looking for something stable, tried-and-true.

EQT Exeter, which announced the launch of its REIT Thursday, said in a statement that it would “generally seek to invest approximately 80% in properties with business tenants, such as industrial or life science properties, and approximately 20% in real estate assets with consumer users, such as multifamily or self-storage properties,” though it declined to comment to Bloomberg on the timing of the launch. 

Investors putting their money into nontraded REITs are investing in the experience and qualifications of the asset manager at the helm of the vehicle, Coverman said.  

“This is exactly the time that an experienced real estate manager is going to consider diversifying their fundraising strategy,” Coverman said.

With real estate returns expected to stabilize as we move into the coming year, new entrants would be well-positioned for the stabilization. 

That’s not to say that nontraded REITs as a whole have been untouched by the turmoil that has roiled the commercial real estate market. 

A handful of high-profile, nontraded REITs made headlines over the last 12 months when they received redemption requests in excess of previously set limits on those withdrawals. 

Given the amounts that these REITs are managing, the redemptions are significant. Gannon said his firm estimates that aggregate redemptions will reach around $20B this year for nontraded REITs, which he qualifies as “a staggering number of redemptions.” 

But Gannon said, while this period of redemptions is challenging, the fact that nontraded REITs can make those payouts is a sign that things are working as they should. 

“Once we meet this test through the next several months, through the end of this year and clean up all the redemption requests, I think this structure is going to take off like a rocket,” Gannon said.