Colliers Capital Markets recently sat down with Jeff Jacobson, Chief Operating Officer, Colliers Securities, to discuss the latest trends in the public markets.

Colliers Capital Markets (CCM): The public markets are often viewed as a leading indicator of pricing movement for private real estate. With REITs rebounding, what does this suggest for overall investment sales activity?

Jeff Jacobson (JJ): We agree that the public markets generally indicate what will follow in the private sector. Capital market activity like stock issuance and an easing Fed should lead the public markets to be more active with transactions. This momentum should bleed down to the private sector, creating some tailwind for real estate. 

CCM: How are the markets valuating REITs today? Are they trading at NAV yet, and are there key differences across sectors?

JJ: Today, the public markets are valuing REITs at a 5% discount to NAV, with a wide deviation from sector to sector. As investors position themselves to defensive sectors, healthcare and self-storage are trading at 20% and 15% premiums to NAV, respectively. Office REITs are at the steepest discount, nearly 20%. Excluding office from the REIT index, the overall sector is trading at par with NAV.

CCM: Do higher share prices suggest REITs will become more active soon?

JJ: Given that higher REIT share prices lower the cost of capital, REITs are likely to become more active in the acquisition market, as they can issue equity and buy assets on an accretive basis. Many will also issue additional debt on a leverage-neutral basis to grow their portfolio. In contrast, some over-leveraged REITs might use money from an equity offering to reduce their debt. Buybacks are generally not part of the equation.

CCM: There has been a lot of discussion on loan maturities. Are REITs able to refinance more easily than other borrowers?

JJ: Yes, all REITs have lines of credit and typically use them as a bridge to more permanent financing through debt or equity. Generally, they have spread out their debt maturity schedules and do not have a lot of debt maturing over the next three years – only 7% of total enterprise value. However, office REITs have the highest rollover rate, at 23%, over the same period. While most should not have difficulty refinancing their debt, the office sector will likely face the most challenges.

CCM: Where do you see the best value in the REIT sector today?

JJ: Obviously, the office sector is extremely cheap. However, investors are not quite ready to put their money to work in that sector. Interestingly, industrial is screening attractively, down 2%, while the REIT sector is up 11% YTD. With new development being absorbed and minimal new construction, fundamentals in this sector should improve, setting the stage for outperformance in 2025.

CCM: Do you foresee consolidation in the industry or new entrants?

JJ: Generally, I do not foresee a wave of take-outs or consolidations. However, for REITs trading at substantial discounts with desirable assets, we could experience some take-out bids. Additionally, as valuations improve across the REIT landscape, we should see a pick-up in IPO activity.

 Colliers Securities is a registered securities broker-dealer with over 40 years of experience, specializing in investment and capital-raising strategies to help clients achieve their long-term investment objectives. As a full-service investment banking and investment services firm, Colliers Securities offers a wide array of investment products and services to institutions and individuals nationwide.

Real Estate Investment Trust (REIT) Disclosure: A REIT is a company that owns, operates, or finances income-generating real estate. REITs pool the capital of numerous investors, which makes it possible to leverage the pooled capital to target investments that would otherwise not be available. REITs typically have low growth, dividends are taxed as regular income, are subject to market risk, and typically have high management and transaction fees. Investors should consider all investment risks, fees, objectives, suitability, and risk tolerance before investing, and talk to their financial representative about if this investment is right for you.