Rising Interest Rates Curtail REIT Fundraising

First-Quarter Total of New Capital Was $10 Billion Less Than a Year Earlier, Trade Group Says

Real estate investment trusts backed off debt and equity issuance as interest rates started rising. (Getty Images)

By Mark Heschmeyer
CoStar News
May 5, 2022 | 9:07 A.M.

Rising interest rates slowed the amount of capital raised by publicly listed real estate investment trusts, according to analysis from industry trade group Nareit.

U.S. REITs raised $10 billion less in the first quarter compared to the same quarter a year earlier.

The number is important in that record fundraising last year helped drive record commercial property acquisitions. Publicly listed REITs acquired $66.5 billion in properties in 2021, according to CoStar data. That number is $22.2 billion more than properties they sold. Both numbers were the largest on record this century.

That activity occurred while REITs raised more than $120 billion in capital last year, according to Nareit data.

“Between the fourth quarter of 2021 and the first quarter of this year, we saw the average yield to maturity on secondary debt offerings for U.S. REITs rise from around 1.76% to around 2.95%,” John Barwick, vice president of index management and industry information at Nareit, told CoStar News in an email. “So, the point is simply that
borrowing costs have risen and we’ve seen a resulting decrease in the amount of debt issued.”

Historically, from the first quarter of 2018 through the fourth quarter of 2019, when the federal fund borrowing rate was above 1.5%, REITs raised $18.3 billion per quarter on average, according to CoStar analysis of Federal Reserve and Nareit data.

As the pandemic swept the United States in first quarter of 2020, the Fed dramatically lowered its borrowing rate to an average of about three-quarters of a percent. From that point on, REIT capital raising shot up. Last year, REITs raised an average of $30.4 billion a quarter.

In the first quarter, they raised a bit more than $25 billion in public stock and secondary debt offerings. That is down from the $35.4 billion raised during the first quarter of 2021.

The decline came primarily from secondary debt offerings, which fell to $10 billion from the $22.2 billion raised in the first quarter of 2021.

Separate analysis from S&P Global noted that specialty REITs investing in such assets as casinos, data centers, communications and energy infrastructure, land, and timber real estate accounted for the largest share of capital raised through March at $7.51 billion, followed by the retail and residential sectors at $3.41 billion and $2.06 billion,

Source: CoStar News

(Posted with permission from CoStar News)