The Discussion: Navigating the 2023 Outlook for Commercial Real Estate and REITs
The commercial real estate landscape is constantly evolving, shaped by economic trends, market performance, and external factors. In a recent episode of “America’s Commercial Real Estate Show,” host Michael delved into the 2023 outlook for the economy, commercial real estate, and Real Estate Investment Trusts (REITs). Joined by Ed Pierzak, Senior Vice President of Research at NARIT, the discussion covered topics ranging from recession risks to inflation, historic REIT performance, and strategies for navigating the current market uncertainties.
Recession Risks and REIT Resilience:
The conversation kicked off with the elephant in the room: recession risks in 2023. Pierzak highlighted the concerns stemming from mixed economic growth, job gains, inflation, and rising interest rates in 2022. However, he reassured listeners that REITs are well-positioned to weather economic uncertainties. Analyzing REIT operational performance and balance sheets, Pierzak emphasized their resilience, with REITs showing robust results, particularly in the third quarter of 2022.
Impact of Interest Rates on Transaction Volume:
The surge in interest rates was acknowledged as a factor impacting transaction volume and property values. While acknowledging the influence of higher interest rates on the market, Pierzak emphasized that REITs, with their low average cost of debt, remain in a favorable position. The conversation also touched on the divergence in valuations, with REITs showing solid operational performance but experiencing declines in total returns.
Inflation and its Impact on Commercial Real Estate:
The discussion turned to inflation, a current concern for many stakeholders in the commercial real estate sector. Pierzak acknowledged the challenges posed by inflation but highlighted real estate’s historical role as an inflation hedge. Using data from NARIT’s T-Tracker, he demonstrated that REITs have been able to keep up with the pace of inflation, offering a positive outlook for 2023.
Office Sector Dynamics:
The episode addressed the unique challenges faced by the office sector, particularly in the wake of remote and hybrid working trends. Pierzak noted that the future of the office sector is still uncertain, with the impacts of work-from-home and hybrid working yet to be fully understood. Bull shared insights from his experiences in dealing with office property owners and managers, anticipating a continued decline in demand with potential recovery in the years ahead.
Historic REIT Performance and Strategic Positioning:
Pierzak delved into the historic performance of REITs during past downturns, dispelling concerns about negative property total returns during recessions. He highlighted the lead-lag relationship between public and private real estate, with REITs historically outperforming during and after recessions. The conversation explored the potential opportunities for REITs in 2023, both tactically and strategically, positioning them as resilient and well-equipped to navigate uncertainties.
Conclusion:
As the episode concluded, Pierzak left the audience with a positive outlook, describing REITs as resilient in the face of uncertainties. The 2023 outlook for commercial real estate and REITs, as discussed on “America’s Commercial Real Estate Show,” emphasized the sector’s ability to adapt and thrive amid changing economic landscapes. For those seeking more detailed insights, NARIT’s 2023 Outlook report is available on their website.