How Have REITs Impacted the Market Since Their Inception 50 Years Ago?

Last week celebrated the 50th anniversary of real estate investment trusts.  On September 14th, 1961, then President Dwight D. Eisenhower signed legislation that created the new approach to income-producing real estate investment, making the asset class more accessible to a much broader range of people.  Essentially, it was a merger of real estate and stock based investment. Today, over 10% of all commercial real estate is owned by REITs.  With the expected number of REITs to explode in the coming 18-24 months, much like it did in the early 1990s, that percentage is sure to grow over the next decade.

As with any new investment class, it took a while…..a long while actually, for REITs to really catch on with investors. Over time, investors responded to this new opportunity, and listed U.S. REITs today constitute a more than $300 billion equity market with an average daily trading volume of about $4 billion. Unlisted REITs in the U.S. now manage assets of more than $70 billion and are adding another $7 billion annually. Outside the U.S., REITs and listed property companies constitute another $700 billion plus, comprising a listed REIT and real estate investment universe of more than $1 trillion. Some of the big players? Brookfield Properties BPO, Vornado Realty Trust VNO, Kimco Realty Corp. KIM, PREIT PEI, Simon Property Group SPG and ProLogis PLD to name a few.

To quote Steve Wechsler, CEO of NAREIT, “REITs in the U.S. and increasingly around the world now regularly provide investors with meaningful dividends, portfolio diversification, valuable liquidity, enviable transparency and competitive performance.”

The benefit of REITs are numerous.  First off, relative to other stock type investments, they are required by law to return at least 90% of their earnings in the form of a dividend to stockholders.  While most REITs, like most real estate operators focus on one specific asset class, say office or retail, they typically buy trophy assets for their portfolios in order to inundate themselves from market fluctuations and occupancy loss (generally speaking there's always a flight to quality during recessions). Given their access to public capital, something most REITs competitors do not have, they really changed the commercial real estate investment game.  They could afford to buy assets in all cash transactions, making financing contingencies disappear.  This of course was a huge advantage for them, and partially what has led to their dominance of ownership of class A properties in good locations. They have made individual high net worth investors focus on smaller properties in secondary markets, and have really made the game a lot more institutional in nature. Its like trying to compete with the Yankees with a far more limited payroll.

What is interesting is that the way most REITs are analyzed, since they are publicly traded companies who have a more limited ability to reinvest profits in their assets, their stock price is largely predicated upon their ability to grow their portfolios.  Growth, of course is defined by income generated, or perhaps NOI.  The best way to grow NOI is to keep acquiring well performing assets in good locations, which is precisely why REITs are poised to continue to grow.  Additionally, as more private companies have found that accessibility to capital has been constrained, there is a growing desire by then to access public markets, and one of the best ways to do that is by forming a REIT.  It changes your companies business philosophy, and possibly your strategy, but it keeps you competitive in the long run. The future, my readers, is in REITs.