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  • Writer's pictureRealFacts Editorial Team

Private REITs Ramp Up Acquisitions as Falling Prices Attract Investors

Privately traded REIT

Non Traded real estate investment trusts (REITs) have ramped up their property acquisitions, signaling that higher interest rates have driven real estate prices to an attractive level for investors, according to Mark Heschmeyer at CoStar News. Recent SEC filings reveal that 15 of 19 reporting REITs increased their net investments in May compared to April, with a combined net investment rise of $119.9 million, reaching $161.06 billion after a previous month’s decline of $633 million. This renewed activity mirrors trends from early 2022 before the Federal Reserve began a series of interest rate hikes to combat inflation.

Renewed Acquisitions Amid Economic Shifts

This uptick in property buying reflects a cautious optimism among REIT executives about returning to the investment markets. Luke Schmidt, Vice President of Research at Blue Vault Partners, highlights that the largest player in the sector, Blackstone Real Estate Income Trust, has managed to meet its shareholder redemption requests, indicating improved control over redemptions. "These funds are more optimistic that they have redemptions under control, otherwise they would be more likely to hold onto their cash," Schmidt said.

However, despite this optimism, the overall landscape remains challenging. The formation of nine new nontraded REITs since August 2022 has not reversed the decline in private REIT portfolio values. The increase in property acquisitions is overshadowed by a surge in share buyback requests from shareholders, a common occurrence in nontraded REITs where shares are not publicly traded and rely on the REIT for liquidity.

The Role of Interest Rates and Redemption Challenges

High interest rates have significantly impacted the real estate market, making properties more affordable and attractive for investors willing to capitalize on lower prices. Yet, this environment also brings about challenges. Many REITs are still grappling with redemption pressures, balancing the need to acquire new properties against the necessity to retain cash for potential share buybacks.

Starwood Real Estate Income Trust, the second largest of the 19 REITs, reported a $39.8 million increase in net property investment in May compared to April. However, it also announced limitations on share redemptions, reducing them from 2% of net asset value monthly and 5% quarterly to 0.33% monthly and 1% quarterly. These stricter limits are expected to last for six to twelve months. Following Starwood's announcement, a 65% average increase in monthly redemption requests was reported across top net asset value REITs, with some REITs seeing requests more than double compared to April.

Major Acquisitions Highlight Renewed Interest

Despite these challenges, several significant acquisitions took place in May. Apollo Realty Income Solutions acquired a newly constructed distribution center in Byhalia, Mississippi, for $58 million. This facility, within the metropolitan Memphis area, spans almost 708,000 square feet and is fully leased to PepsiCo through January 2031 with two five-year renewal options. Additionally, Apollo acquired Madison Harper Place, a newly constructed, 186-unit, garden-style multifamily property in Charleston, South Carolina, for $49 million.

J.P. Morgan Real Estate Income Trust also made a notable acquisition in May, purchasing a 95% interest in the Shops at Grand Avenue, a 99,837-square-foot, Class A grocery-anchored shopping center in the Maspeth neighborhood of Queens, New York, for about $48.3 million.

Future Prospects and Market Dynamics

The renewed interest in property acquisitions by private REITs signals a strategic shift as they look to take advantage of lower prices. Blackstone's June shareholder report expressed optimism, anticipating a pickup in transaction activity due to decreased borrowing costs and increased debt availability as property owners become willing to accept lower prices.

Starwood REIT also adjusted its redemption policy, freeing up capital to invest in additional real estate. “Even while Starwood looks like they’re going to continue having problems with redemptions at least through the end of the year, and likely longer, by reducing the amount they would have to spend to repurchase shares, it frees up that much cash flow to invest in additional real estate,” Schmidt noted.

While the current economic conditions present both opportunities and challenges for private REITs, the recent increase in property acquisitions indicates a potential shift in market dynamics. With interest rates potentially decreasing and debt availability increasing, REITs are poised to capitalize on emerging opportunities. However, the sustainability of this renewed acquisition activity will depend on how effectively these REITs manage their redemption pressures and navigate the evolving economic landscape.


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