2012 REIT report

US: REITs rebound but face challenges

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Current state

Last year the REIT market returned to robust growth. The total returns of public equity REITs increased more than 8% in 2011, compared with about a 2% gain for the S&P 5007. REITs raised a record US$37.5 billion of equity last year – the most since the US$32.7 billion of 1997.

For REITs, 2012 could be like 2006, a boom year for raising and investing capital.

Their total market capitalization increased to US$632 billion, the highest since 2006, when it reached US$412 billion. REITs continued to reduce their debt. As of September 2011, the listed US REIT industry’s ratio of debt divided by total market capitalization stood at 41.6%, approximately its historical average8.

Market outlook

Of 140 REITs tracked by SNL Financial, about one-third raised their dividends in 2011, compared with 17% the previous year 9. Commercial property markets are continuing to improve, although the recovery has been uneven.

Occupancies and rents generally are rising in the strongest markets, and REITs’ property cash flows are increasing. Even so, it’s uncertain whether as many REITs will raise dividends in 2012 as in 2011. Some may elect to take capital that would have gone into higher dividend payments for investment in property improvement acquisitions.

Non-traditional REITs

The growth of non-traditional REITs has continued to gain momentum, as companies look to achieve greater tax efficiency and value for their shareholders. Recently, companies that have successfully sought private letter rulings from the IRS to realign their operations as REITs have ranged from timber, health care, data storage, cell tower operation and energy transmission businesses.


A challenge for public equity REITs is to make investment decisions and manage assets in an uncertain economic environment. Among other factors, high unemployment, a slow rate of hiring and high gasoline prices have raised concerns about the durability of the US economic recovery10. Tenant demand for space is uneven, and the risks for REITs in investing in and owning properties vary considerably across geographic markets and property sectors.

Demand is strongest for institutional-grade assets in metropolitan markets on both coasts and in some other cities and certain property sectors, such as multifamily.


Over the past few years, REITs have restructured their balance sheets, reduced their debt and raised fresh capital in the equity and debt markets, and they are well positioned to make property investments.

Credit is more available — in the 2011 fourth quarter, banks increased commercial property lending for the first time in two years11. The market for commercial mortgage-backed securities is starting to recover, helping to inject more liquidity into the commercial mortgage market12.


For REITs, 2012 could be like 2006, a boom year for raising and investing capital. The REIT industry has been able to weather the storm of the global recession and financial crisis. That experience has reinforced for REITs the importance of sound risk management in investing and managing assets.

REITs will put that experience to good use in 2012 as they manage in an uncertain economic environment and an uneven property market recovery.

  1. 7 “2011 Returns Are Four Times Those of S&P 500,” National Association of Real Estate Investment Trusts news release, 4 January 2012, http://www.reit.com/portals/0/PDF/NAREIT-2011-REIT-Market-Report.pdf.
  2. 8 “Ibid. September 2011 debt ratio is latest available from NAREIT.
  3. 9 A.D. Pruitt, “REITs Keep Raising the Ante on Dividends in Strong Market,” The Wall Street Journal, 20 January 2012.
  4. 10 Annie Lowrey, “Rising Fears That Recovery Once More May be Faltering,” The New York Times, 19 April 2012, http://www.nytimes.com/2012/04/20/business/economy/concernsform-backdrop-for-economic-meetings.html?emc=eta1.
  5. 11 Hui-Yong Yu, “US Banks Step Up Commercial Real Estate Lending For First Time Since 2010,” Bloomberg, 29 February 2012, http://www.bloomberg.com/news/2012-02-29/u-sbanks-increase-commercial-property-lending-for-fi rst-time-since-2010.html.
  6. 12 Nicholas Ziegler, “New Signs of Life in the CMBS Markets,” Commercial Property Executive, 4 April 2012, http://www.cpexecutive.com/newsletters/capitalmarkets-newsletter/features/new-signs-of-life-in-the-cmbs-markets/.