The investment activities of real estate investment trusts (REITs) are a good indicator of the broader commercial real estate market landscape. Heather Boelens, a Denver-based attorney who works closely with institutional investors on real estate deals, discussed how REITs responded to the COVID-19 pandemic, as well as where they’re looking for the rest of this year and beyond.
How did REITs initially respond to the pandemic?
There were a lot of questions as to what was going to happen with the economy, what the next steps were going to look like, etc. I would say, for about a month, everything really shut down, there was just so much uncertainty and everyone just decided to put everything on pause. Last April (2020), I had about eight active acquisition deals. Six were called off completely, and two picked back up with a longer closing period that ended up closing in the summer and early fall.
Have you seen a notable uptick in activity more recently?
Now, I’m seeing an extreme amount of competition. I’ve seen some situations where clients with properties with signed letters of intent get deals pulled out from under them because other buyers likely have come in and convinced sellers, especially noninstitutional sellers, that they should accept a better deal. I really feel a lot of confidence in the market and, in particular, the data center, infrastructure and industrial REIT categories. That’s not true yet with respect to retail, or hospitality/resort REITs.
Are REITs dumping any assets?
I’ve seen some of that. I was talking to a client the other day that has dumped office and retail. It is interesting because I was uncertain if this client would be able to dump office and retail at any sort of a successful return, and they have. There are some non-REIT buyers that don’t necessarily have a duty to their investors, that are still willing to give some of these asset classes a chance and maybe are looking for a good deal with some sort of small return.
There are REITs with a lot of capital that they need to try to deploy this year, and now they’re all in competition with each other because they weren’t able to deploy any capital last year.
Do REITs only look at high-end properties in major markets?
I would say no. A couple of the clients that we represent really look for everything, including development opportunities, especially as it relates to the industrial and the infrastructure world. They’re trying to find some strategic locations to build and to develop, or work with other developers to build.
There’s still really a lot of activity in the value-add department, but those value-add opportunities are really difficult to find. A lot of REITs are trying to find small deals where they have a value-add opportunity, even if it’s under $10 million. Because there’s so much competition, they’re willing to grab whatever might be available to them.
Will acquisition activity pick up this year as more properties become available to buyers?
That’s yet to be seen. There are a lot of companies that are still in a holding pattern. Many companies are waiting to see what’s happening with the market because of the extreme competition. I think they’re holding to see what’s going to happen, because everyone is pretty confident that this competition is not going to go away. There are REITs with a lot of capital that they need to try to deploy this year, and now they’re all in competition with each other because they weren’t able to deploy any capital last year.
How long will it take for the market to get more clarity?
It will be different for each asset type. I don’t think anyone would question the fact that industrial, infrastructure and data centers are going to continue to be strong. We’re still going to see a lot of competition. Office is a big question mark for everyone, and I would say we won’t really have any answer on that until after this year has concluded. We’ve seen a lot of downsizing in the office-space market already. ●