Key Trends Shaping the REIT Market in 2024

Impact of inflation and interest rates on REITs

Inflation and rising interest rates are significantly impacting REITs by increasing financing costs, complicating debt refinancing, and limiting acquisition opportunities. Companies are also observing shifts in customer behavior due to these economic pressures, which could further influence REIT performance and market dynamics.

"The ongoing challenges posed by the increase in interest rates and inflation could adversely impact our cash flow from continuing operations but we anticipate that cash flow from continuing operations over the next twelve months together with cash balances on hand will be adequate to fund our business operations, cash distributions to unitholders of the Operating Partnership, cash dividends to our shareholders, debt amortization and recurring capital expenditures." --- (VNO, sec filing, 2024/Q1)

"Additionally, inflationary periods may cause us to experience increased costs of financing, make it difficult to refinance debt at attractive rates or at all, and may adversely affect the properties we can acquire if the cost of financing an acquisition is in excess of our anticipated earnings from such property, thereby limiting the properties that can be acquired. Impact of Real Estate and Capital Markets" --- (O, sec filing, 2024/Q2)

"That said, as we evaluate the market, persistent inflation and high interest rates have kept more customers focused on controlling costs." --- (PLD, earning call, 2024/Q1)

"So I think even if these levels were in pretty good shape, if you have a -- if you have kind of a longer downturn, then it's realistic to think that consumer spending is going to be reined in. But offsetting that obviously will be, low inflation, lower interest rates and you can -- you could potentially see a scenario that we dealt with pre-COVID, right?" --- (SPG, earning call, 2024/Q2)

"Additionally, as further discussed under the caption “Risk Factors” in Item 1A of the 2023 Form 10-K, market volatility and disruption caused by inflation, rising interest rates and supply chain disruptions may impact our ability to raise additional capital through debt financing activities or our ability to repay or refinance maturing liabilities, or impact the terms of any new obligations." --- (AMT, sec filing, 2024/Q2)

Shifts in consumer behavior and remote work trends

Shifts in consumer behavior and remote work trends are impacting the REIT market, particularly in office space demand, as indicated by Vornado's occupancy challenges due to tenant move-outs. Meanwhile, strong demand persists in retail and data center sectors, suggesting a mixed but evolving landscape influenced by these trends.

"But it's also how we're going to push down from the top, how do we create how do we widen the aperture of our opportunity, I think they'll have a meaningful impact on our business on a go forward basis." --- (EQIX, conference, 2024/06/04)

"But I think like occupancy, it's down now. It's going to trend down a little bit more, given, for example, the Meta move-out in June, but we have some other things in the works that we can pick that up." --- (VNO, earning call, 2024/Q1)

"Demand for our space from a broad spectrum of tenants is strong and steady. Our company is focused on creating value through unique and disciplined investment activities that will continue to deliver long-term growth and cash flow, funds from operations and dividends, as you've seen by our recent increase in our dividend per share." --- (SPG, earning call, 2024/Q2)

"And we would expect this line item to continue to gather momentum. With the record commencements in the second quarter and the healthy backlog of favorably priced leases ready to commence in the second half, we are well positioned for accelerating top line and bottom line growth for the remainder of 2024 and into 2025. Subsequent to quarter end, we also strengthened our value proposition in Europe through our entrance into the sought submarket of London." --- (DLR, earning call, 2024/Q2)

"Turning to the capital markets now. While the financing markets remains challenging for office and banks remain out for the MART, we are beginning to see some early signs of improvement with the CMBS market open again for selective high-quality assets and even ones that are less straightforward." --- (VNO, earning call, 2024/Q2)

Sustainability trends in the REIT market

Sustainability is becoming a central focus in the REIT market, particularly in Europe, where companies are increasingly prioritizing sustainable practices. Initiatives like sustainability-linked pricing and long-term growth objectives reflect a commitment to integrating sustainability into business strategies, signaling a trend that is expected to gain traction across the sector.

"The European companies are leading. There's a tremendous amount of interest in sustainability." --- (EQIX, investor conference, 2024/06/12)

"Our primary business objectives are to maximize: (i) sustainable long-term growth in earnings and funds from operations per share and unit; (ii) cash flow and returns to our stockholders and Digital Realty Trust, L.P.’s unitholders through the payment of distributions; and (iii) return on invested capital." --- (DLR, sec filing, 2024/Q1)

"This is one example of a sustainability initiative that we believe will become commonplace in the markets we serve in the future." --- (EQIX, earning call, 2024/Q2)

"These facilities also feature a sustainability-linked pricing component, with pricing subject to adjustment based on annual performance targets, further demonstrating our continued leadership and commitment to sustainable business practices." --- (DLR, sec filing, 2024/Q1)

"Also, our sustainability story, which Katrina can tell you a lot about as well, really contributed to our ability to secure power from this very constrained market." --- (EQIX, conference, 2024/06/12)

2024 outlook for the REIT market

The 2024 outlook for the REIT market suggests a mixed environment, with expectations of increased vacancies in U.S. and European markets, while companies like Digital Realty anticipate cash NOI growth of 4.5% to 5.5%. Additionally, tax deductions on dividends remain favorable for investors.

"- Completed 108,000 Square Feet of Leasing and an Additional 414,000 Square Feet Subsequent to Quarter End - - Declares Dividend of $0.10 Per Share for First Quarter 2024 - - Company Reaffirms 2024 Outlook - Orion Office REIT Inc. (NYSE:ONL) ("Orion" or the "Company"), a fully-integrated real estate investment trust ("REIT") focused on the ownership, acquisition and management of a diversified portfolio of single-tenant net lease office properties located across the U.S., announced today its operating results for the first quarter ended March 31, 2024." --- (ONL, press release, 2024/05/08)

"Non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning before January 1, 2026." --- (DLR, sec filing, 2024/Q1)

"We estimate vacancies in our U.S. and European markets will peak over the next few quarters, likely creating a shift in tone as customers assess the requirements heading into 2025." --- (PLD, earning call, 2024/Q2)

"So, we’re seeing, for the outlook for 2024, LATAM is going to be coming in around 2% organic tenant billings growth." --- (AMT, earning call, 2024/Q1)

"Highlighted in our investor presentations, excluding the nearly 200 basis points of power margin headwinds that we have previously discussed, our same capital cash NOI growth for 2024 would be 4.5% to 5.5%." --- (DLR, earning call, 2024/Q1)

Emerging sectors in the REIT market

Emerging sectors in the REIT market are driven by strong demand in telecommunications and data centers, particularly in Europe and Africa. Companies like American Tower and Digital Realty are focusing on large capacity needs and high returns in these regions, indicating significant growth potential.

"You've heard us say we continue to see demand for our emerging markets. And in Europe, we're seeing escalating new business growth, which is really good." --- (AMT, earning call, 2024/Q2)

"The biggest customers are desiring, one, contiguous capacity blocks that are very large; two, they want them right now or as soon as possible; and three, the desire of fungible markets, i.e., markets where they can service certainly GenAI workloads, trading ultimately inference, but also if they miss the measure, they can support their cloud computing needs as well." --- (DLR, earning call, 2024/Q2)

"As we expand into new markets, our partners are accelerating our efforts to sell the global platform." --- (EQIX, earning call, 2024/Q1)

"But I wanted to ask a question on sort of the market and get Steve and Michael's view on the opportunity that's going to be presenting itself, I think, when the $200 billion of office loans mature over the next -- actually, in '24 as well as the other $100 billion next year." --- (VNO, earning call, 2024/Q1)

"Certainly, when you think about the emerging markets, we're looking at low teens here and heading upwards, we would expect them all to be in the upper teens certainly in places like Africa, above 20% over time, would certainly be where we would target that.So, broadly speaking, you've heard us say it before, but when you think about Africa, we're looking for high teens, north of 20% returns." --- (AMT, earning call, 2024/Q2)

Global economic factors influencing REIT performance

Global economic factors are significantly influencing REIT performance, as evidenced by varying impacts on property values and availability. Despite headwinds, strong market fundamentals have led to solid results for some REITs, while others face challenges from cap rate expansion and potential increases in available properties due to economic cycles.

"However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our data centers that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our data centers, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited." --- (DLR, sec filing, 2024/Q1)

"The strength of our markets, quality of our properties and talent of our team led to solid quarterly results, amidst global economic headwinds." --- (PLD, twitter, 2024/04/17)

"It has been our experience that approximately 1% to 4% of our property portfolio will be available for lease at any given time; however, it is possible that the number of properties available for lease or sale could increase in the future, given the nature of economic cycles and other unforeseen global events." --- (O, sec filing, 2024/Q2)

"Over the last 1.5 years, global values have decreased despite increases in cash flow due to cap rate expansion." --- (PLD, earning call, 2024/Q1)