Nontraded real estate investment trusts have increased their property purchases, a sign that higher interest rates have driven down real estate prices to an attractive level for investors.
A review of filings with the Securities and Exchange Commission showed that 15 of 19 reporting REITs of this type posted more net investments in May compared to April. The 19 REITs combined reported a net investment increase of $119.9 million in the most recent full month to reach $161.06 billion after a decline of $633 million in the prior month.
The renewed activity echoes trends in early 2022 before the Federal Reserve began raising interest rates to try to drive down inflation. From March to August 2022, 10 nontraded REITs boosted portfolio values by $49.8 billion, moves that ended as the Feds raised interest rates 11 times between March 2022 and July 2023 and drove up costs.
While the upswing in property buying may be temporary because investors are still seeking to cash out — giving these REITs a reason to hang on to cash even as they are enticed by lower prices — Blue Vault Partners Vice President of Research Luke Schmidt told CoStar News it's still a sign that executives at these REITs are at least thinking about a larger return to the investment markets. He highlights the fact that the largest player in the sector, Blackstone Real Estate Income Trust, has been able to meet its redemption requests from shareholders.
“These funds are more optimistic that they have redemptions under control, otherwise they would be more likely to hold onto their cash,” Schmidt said in an email.
That optimism is tempered. Despite the formation and launch of nine nontraded REITs since August 2022, private REIT portfolio values have continued to decline. The May uptick in property acquisitions is muted by a surge in share buyback requests from shareholders of nontraded REITs, a type of fund that raises capital through the private sale of shares to investors. The stocks are not publicly traded, so shareholders have to rely on the REIT to buy back their shares.
Redemptions Persist
While Starwood Real Estate Income Trust, the second largest of the 19 REITs, reported a $39.8 million increase in net property investment in May compared to April, it also announced limitations on share redemptions, reducing them from 2% of net asset value monthly and 5% quarterly to 0.33% monthly and 1% quarterly. Starwood expects these stricter limits to last for six to 12 months.
Following Starwood's announcement, David Inauen, head of research at Robert A. Stanger & Co., reported a 65% average increase in monthly redemption requests across top net asset value REITs, entities that report their share value monthly based on the net asset value of their holdings divided by shares outstanding. Some REITs saw requests more than double compared to April, Stanger reported in a statement.
Blackstone experienced such a surge in redemptions following Starwood's news. However, Blackstone claims to have fulfilled all May redemption requests.
With capital potentially diverted toward share buybacks, it remains unclear if the renewed interest in acquisitions can be sustained. Redemptions will probably outpace fundraising for 2024, potentially hindering significant property acquisitions, Kevin Gannon, chairman and CEO of Stanger, told CoStar in an email.
Blackstone reflected optimism in its June shareholder report. It said it expected a pickup in transaction activity due to decreased borrowing costs and increased debt availability as owners are willing to accept less for their property.
Starwood REIT also reported last month that with forecasts for lower interest rates and increased availability of debt, it adjusted its redemption policy to hang on to capital to be able to take advantage of emerging lower prices.
“Even while Starwood looks like they’re going to continue having problems with redemptions at least through the end of the year, and likely longer, by reducing the amount they would have to spend to repurchase shares, it frees up that much cash flow to invest in additional real estate,” said Schmidt of Blue Vault.
Acquisition Activity
The largest of the REIT portfolio increases in values in May came from two of the smaller and newer REITs, Apollo Realty Income Solutions and J.P. Morgan Real Estate Income Trust.
On May 29, Apollo Realty Income acquired a newly constructed distribution center in Byhalia, Mississippi, a property within metropolitan Memphis that spans almost 708,000 square feet.
The facility is 100% leased to PepsiCo through January 2031 with two 5-year renewal options. The property was acquired for $58 million.
Two weeks earlier, it acquired Madison Harper Place, a newly constructed, 186-unit, garden-style multifamily property in Charleston, South Carolina, for $49 million.
On May 16, J.P. Morgan REIT bought a 95% interest in the 99,837-square foot Shops at Grand Avenue, a 100% leased, Class A grocery-anchored shopping center in the Maspeth neighborhood of Queens, New York, for about $48.3 million.