Five reasons to be positive on North American REITs: Insights from the NAREIT Conference

Following a tough period for the sector, my interactions with leading property companies across Canada and the US at the NAREIT Conference in June shed light on several reasons to remain optimistic about North American REITs.

In early June, I travelled from Melbourne to New York to attend the National Association of Real Estate Investment Trust (NAREIT) property conference. The goal of this visit was to catch up with leading property companies across Canada and the US to hear first-hand about the true state of the North American commercial property market.

North American REITs had a tough 12 months in terms of performance. While clearly challenged from structural and cyclical factors, the office sub-sector is really only a small part of the overall listed property universe (<4%)¹ but has been overrepresented in generating the sector’s negative headlines.

Our view has been that most commercial property sub-sectors are finding their rental streams relatively resilient in the face of economic weakness, while their share prices are suffering from being unfairly likened to office. We see several attractive sub-sectors in North American REITs, namely multi-family, data centres, industrial and healthcare.

Below I have shared my top five takeaways from the conference that work to reinforce our Real Asset team’s ongoing positive view on North American REITs.

1. US economic weakness is not evident and tenant demand remains strong

   The US retail REITs I spoke with did not give any indication of a recession in terms of spending across their tenants, with spending still positive and in many cases above 2019 levels. There are, however, some signs of “trading down” to more affordable price points.
   
   A key positive was that retailers are looking to add a meaningful number of stores, indicating that bricks and mortar remains key to their omni-channel offering.
    

2. Funding markets appear open for most REITs

   Most listed REITs in the US are large, diversified vehicles with reasonable levels of long-tenured debt. Two areas that are struggling to find funding are office REITs, given falling valuations, and developers, via construction loans.

   While this is a negative, the direct impact to REITs is limited, and potentially sets up a positive supply situation over the coming years should privately built assets not be able to complete, as well as offering inorganic acquisition potential. 
    

3. Data growth fundamentals are strong

   From my meetings with data centre operators, the fundamentals remain strong even before you consider the tailwind from Artificial Intelligence (AI).

   We have seen record leasing deals done in 2022, and ongoing cloud deployments, power limitations and lack of supply in some markets are driving higher new renewal rents.

   While AI is still “early days” with much of the architecture yet to be developed, it is expected to drive larger workloads, require more power as well as incremental cooling.

   One large data centre operator we spoke to suggests its initial conversations with tenants around AI may lead to a big incremental wave of demand, with large leasing deals possible over the coming 12 months.
    

4. Demographic trends are positive in key regions

   It should be noted that Martin Currie’s Real Asset philosophy has always been to focus on cities, regions and countries with attractive population growth as, quite simply, more people equate to more demand for real assets. What we are seeing in select states and regions in North America, is encouraging.

   We continue to see large inbound migration to the Southern US states like Georgia and Florida positively effecting retail, housing, industrial and self-storage demand with notable strength in housing (multi-family). These trends were accentuated during Covid but importantly are still strong, with people moving to the Southern states for the low taxes, weather, job growth and cost of living.

   Canada is also seeing strong population growth with significant immigration plans over the next two years (over 450k per year²). This would make Canada the fastest growing G7 country from a population growth perspective and is supporting property demand especially across its key cities like Toronto and Vancouver.

   From my conversations with retail REITs in Canada, these trends remain very supportive of their assets and underlying rent growth.

    

5. Return to office doesn’t mean end of drive for space at home

   During the trip, I was able to physically visit a facility owned by one of our holdings within the self-storage space. The asset, located in Manhattan is a state-of-the-art facility, fully air conditioned with a range of storage products. My conversations with the NY-based manager of the facility suggested ongoing demand for storage space, especially post-Covid with more people not getting rid of their home office, despite a return to the office.

So, what now?

All in all, what I saw on my trip is supportive of our Real Asset team's constructive view on North American property and REIT sectors. We are also particularly encouraged by the data and commentary on the continued positive urban population growth trends.

While we are seeing pressure in some segments like office, this is not reflective of all property segments, with office only a small part of the overall listed property market. And whilst a cyclical slowdown is being seen in some segments through moderating rent growth, and funding pressures are present for developers, we are seeing more value in listed property given the underperformance last year.

We remain encouraged by the size, diversification and resilience evident in the North American listed REITs and believe that listed property remains an attractive investment when blended with other global REITs, utilities and infrastructure stocks.