Sales of nontraded real estate investment trusts are creeping back up off the spring 2020 lows induced by the coronavirus pandemic, and a leading investment bank in the space thinks the products' relative price stability through the crisis will coax some real estate investors over from the public market.
July sales of nontraded REITs totaled $430 million, down slightly from $454 million in June but up 74% from $247 million in May, the monthly low this year, according to data from the investment banking firm Robert A. Stanger & Co. Inc. Sales were racing at an average monthly clip of $2.4 billion in January and February before the economic shutdown in March.
So far this year, nontraded REIT sponsors have raised $7.1 billion, and Stanger expects sales to total $10 billion to $12 billion for 2020. In 2019, sales totaled approximately $11.84 billion.
An industrial warehouse used to fill e-commerce orders. Nontraded REITs typically have a diversified property base, but sponsors and investors are now focusing more on in-favor asset classes like industrial warehouses and data centers. |
While pricing of nontraded REITs — the niche private market alternative to the public REITs marketed to individual retail investors — came down as the pandemic set in, the space has not witnessed the steep price declines or volatility the public market has, Kevin Gannon, Stanger's chairman, said in an interview.
"They came [down], but it wasn't as dramatic," Gannon said of nontraded REIT pricing. "It was more of a real estate adjustment, rather than the dramatic swings of the [public] market. ... What will come out of this is, people will recognize that that's an interesting place to play."
New nontraded REIT model
The increasing number of institutional sponsors, including household names like The Blackstone Group Inc. and Starwood Capital Group Holdings LP, also has helped boost sales in the space.
Blackstone, the highest-selling sponsor by a wide margin for the last few quarters, and other firms like it offer so-called daily net asset value products. In contrast to the old "lifecycle" nontraded REIT product, which typically required a hold period of seven to 10 years before a portfolio sale or public market listing, a daily NAV REIT is a so-called "perpetual life" entity that offers investors a measure of liquidity and regularly updated valuations.
Inspired by Blackstone's success with the model, other institutional asset managers are lining up to get a piece of the pie, even during the pandemic, Gannon told S&P Global Market Intelligence.
"We are getting calls every month from big, big names in the institutional real estate space wanting to come in because they're seduced by Blackstone," he said.
The pandemic has prompted other developments in the space. Nontraded REITs typically have had a diversified property orientation, but sponsors are focusing more now on favored property types like industrial, data centers and apartments, while minimizing exposure to retail, office and other segments where the demand outlook is more uncertain.
Gannon expects nontraded REIT sales to pick up materially in the fall once there is more clarity around the commercial real estate market in general.
"I think there will be pent-up demand," he said. "People are going to get tired of taking 20 basis points on their savings account. ... So I think you're going to see more enthusiasm for it."