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Pandemic Has Muted Impact on Private Real Estate; REITs Underperform

Pandemic Has Muted Impact on Private Real Estate; REITs Underperform
2 min 21 sec

Private U.S. Real Estate

  • The continued impact of the pandemic was reflected in 2Q20 results.
  • All sectors of the NCREIF Property Index saw negative appreciation, but income remained positive except in the Hotel sector.
  • Industrial remains the best performer.
  • The dispersion of returns by manager within the NFI ODCE Index was due to both the composition of underlying portfolios and different valuation methodologies/approaches.
  • Negative returns are expected over the next few quarters.
  • Vacancy rates for all property types are or will be impacted. 
  • Net operating income has declined as retail experienced the largest drop-off in over 20 years.
  • Second quarter rent collections show relatively stable income throughout the quarter in the Industrial, Apartment, and Office sectors. The Retail sector remains challenged, with regional malls impacted most heavily.
Sector Quarterly Returns by Property Type and Region
  • Class A/B urban apartments were relatively strong, followed by certain types of Industrial and Office.
  • Supply was in check before the pandemic.
  • Construction is limited to finishing up existing projects but has been hampered by shelter-in-place policies and shortages of materials. 
  • New construction will be basically halted in future quarters except for pre-leased properties. 
  • Transaction volume has dropped off during the quarter with the exception of Industrial assets that have tenants with strong credit, which are trading at pre-COVID-19 levels.
  • Cap rates remained steady during the quarter. The spread between cap rates and 10-year Treasuries is relatively high, leading some market participants to speculate that cap rates may not adjust much. Price discovery is happening and there are limited transactions. 
  • Callan believes the pandemic may cause a permanent re-pricing of risk across property types. Property types with more reliable cash flows will experience less of a change in cap rates; however, those with less reliable cash flows will see greater adjustments.

U.S. and Global REITs

  • Global REITs underperformed in 2Q20, gaining 10.1% compared to 19.4% for global equities (MSCI World).
  • U.S. REITs rose 11.8% in 2Q20, lagging the S&P 500 Index, which jumped 20.5%.
  • Globally, REITs (except in Singapore) are trading at a discount to NAV.
  • In some regions the discount is at a five-year low.
  • All property types except for data centers, hotels, and life sciences are trading at the bottom of their range.
  • Ongoing volatility in REIT share prices offers opportunities to purchase mispriced securities, individual assets from REIT owners, and discounted debt, as well as lend to companies and/or execute take-privates of public companies.


  • 1Q20 was the third-largest quarter for closed-end infrastructure fundraising ($37 billion), following 4Q19 ($43 billion) and 3Q18 ($38 billion). The closed-end fund market continues to expand, with infrastructure debt, emerging markets, and sector-specific strategies (e.g., communications and renewables). Investor interest in mezzanine or debt-focused funds has increased. 
  • Open-end funds raised significant capital in 2019, and the universe of investable funds continues to increase as the sector matures.  
  • In 2020 assets with guaranteed/contracted revenue or more inelastic demand patterns (e.g., renewables, telecoms, and utilities) fared better than assets with GDP/demand-based revenue (e.g., airports, seaports, and midstream-related).

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