This article is republished with permission from TreppTalk.
According to Commercial Property Executive, overall real estate investment trust (REIT) acquisitions dwindled throughout 2016 while dispositions surged. Acquisitions for equity REITs were down 35 percent year over year, totaling $63.6 billion in 2016. The fourth-quarter volume was the lowest quarterly total since the second quarter of 2010, at just $7.9 billion. On the other hand, dispositions soared to a total of $52.2 billion in 2016, which is a 31 percent year-over-year increase and also “the highest annual figure in industry history.” The sky-high disposition volume caused the net acquisition level to plunge to just $11.4 billion last year, compared with $57.4 billion in 2015. It appears that many REITs are “taking advantage of the high prices to shed noncore assets in primary markets,” particularly apartment and office REITs, which lead overall disposition activity.
Health care and retail REITs posted the highest gross acquisitions in 2016, as health care REITs acquired $9.4 billion and retail acquired $11.4 billion. Both amounts are still significantly down from $22.3 billion and $19.8 billion in 2015, respectively. Almost every major REIT property sector acquired less in 2016, with the exception of single-family homes and data centers. Single-family homes acquired $6.2 billion (a steep increase from $700 million in 2015) and data centers posted $5.2 billion compared with $2.7 billion the year prior.
National Real Estate Investor recounts that since stock prices for most public REITs fell below net asset values in the second half of 2016, the drop in mergers and acquisitions activity “was a function of REITs lacking sufficient capital and stock price valuations to carry out some of the transactions.” Dispositions were contrarily driven by the record-high prices in core markets, and global investors deploying large amounts of capital to the United States.
On the positive side, the fundamentals for REIT returns remain healthy. The FTSE/NAREIT All REIT Index posted a 4.2 percent total return in February, which was slightly above the S&P 500’s 4.0 percent. However, investors can continue to expect decelerated REIT acquisition activity in 2017, as the underlying market trends of high pricing, rising interest rates, and tighter lending are here to stay for the year ahead.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.