Real estate access to capital

It is rare that we get to appreciate a level of stability within the often-volatile real estate markets. But, in the case of capital access, we should all take some comfort and appreciate how consistently the REIT sector continued to access capital across one of the most turbulent macroeconomic sequences in modern memory. Understanding this experience is important for institutional investors, lenders, property operators and investment management executives.

All real estate operators, including those in the REIT sector, faced some wildly changing market environments over the past several years. The COVID health scare brought about a virtually complete shutdown of the world economy. If travel, shopping, dining and simple public gathering were not forcibly prohibited by local governments, then the public effectively ended these activities due to fear of illness. In response to the shutdown, interest rates plummeted and investors moved to safety. Then coming out of the COVID restrictions, interest rates and inflation spiked. These were challenging times to manage, invest in and operate commercial property.

REIT returns measure the operational difficulty during this period and present the volatility faced by real estate owners. Figure 1 shows the total return for the NAREIT (National Association of Real Estate Investment Trusts) Equity Index on an annual basis over the past eight years.

Sources: NAREIT (National Association of Real Estate Investment Trusts)

The alternating years of positive and negative returns reveal the volatility, but the magnitudes may surprise you. During 2020, REITs suffered a negative 8% return, which is not as much as we might expect given the remarkable global economic pause. This number is only slightly worse than the 2018 return. The truly significant returns occurred during 2021 and 2022 as the market rebounded and borrowing rates remained low, followed by a dramatic increase in debt rates leading to a negative return. It would be easy to suggest that operating a real estate investment company that needs to raise both equity and debt capital, attract tenants and estimate consumer demand could have been stymied in its execution.

Of the operating challenges, it seems that capital raising during this time would be the most challenging. Not only does management want to secure the most effective funding, but it must also match its security offerings to investor demand. These offerings do not happen instantaneously; they take planning and marketing. How does the REIT team access a moving demand target with variable funding options when the conditions are changing at this rate?

The answer is pretty well, thank you very much.

In the face of a fluctuating and challenging general economy, REIT constituents of the NAREIT Index continued to raise both equity and debt capital at a remarkably consistent level, as seen in Figure 2. The 2022 decline in aggregate issuance was real and material, but it was a compression, not a collapse. The industry did not lose access to capital markets; it just managed the cost and composition of that access in response to changing conditions.

Sources: NAREIT (National Association of Real Estate Investment Trusts)

Much is hidden in this chart, such as a wide disparity among sector performance, investor shifts from seeking growth to funding distressed acquisitions and intra-year issuance fluctuation. Certainly, not all companies had average fund-raising success. In fact, the lodging sector experienced a near-total withdrawal from capital markets in 2020. Countering this loss, the industrial and data center sectors raised record equity capital in 2021 and maintained issuance well above historical averages through 2023. Office sector issuance declined sharply beginning in 2022 and has not recovered, reflecting structural rather than cyclical challenges. Notwithstanding this sector rotation, the commercial real estate market’s overall ability to navigate such volatility with this collective level of stability is confidence inspiring.

The REIT market is not noted for stability during normal times. Notice the shifts from 2018 to 2019 in both returns and security issuance. This predates any knowledge of COVID — inflation was low and stable, and mortgage rates were gradually rising. Yet 2018 delivered a negative total return and below-average capital raising, followed by 2019 showing strong rebounding returns and significant increases in both equity and debt capital. Observing these performance shifts during relatively stable economic times makes the COVID and post-COVID performance all the more interesting.

More is revealed about the overall REIT industry when this capital-raising pattern is aligned with specific market conditions. Consider the relationship between equity capital raised and the prevailing stock price presented in Figure 3. Using the NAREIT Price Index, the straight horizontal line in the chart at axis point 1.00 reflects the overall market price during 2017. Thus, stock prices fell during 2018 and again in 2020 and 2022 to a level below the 2017 price. As we might anticipate, equity raised during these years is down but only marginally. Throughout these periods, the overall REIT market was able to access equity capital at a fairly steady rate. Acknowledging that we are still working with averages, it is encouraging to see that equity issuance is responsive to price changes but is not crippled by price dips.

Sources: NAREIT (National Association of Real Estate Investment Trusts)

Two general economic conditions seem to have a greater effect on REIT access to capital than stock price. Figure 3 shows a minor relationship between price and equity but no relationship between price and debt raised. Thus, REIT managers were able to maintain funding by shifting between sources. When focusing on total capital raised, inflation and interest rates appeared to have a greater impact on REIT operations. Figure 4 relates capital availability to inflation, and the result is more dramatic than the price relationship. Notice the inflation spike during 2022 and the dramatic reduction in overall issuance during that year. As the inflation rate moved back to 3%, total issuance recovered with virtually all of the movement on the debt side. Equity issuance remained low.

Sources: NAREIT and the St. Louis Federal Reserve – FRED

Despite the apparent linkage between inflation and interest rates, Figure 5 shows a very different curve for the 10-Year Treasury rate than that of inflation. This is not concerning as our measure for inflation is current, and the Treasury is pricing a long future. The difference in curves indicates that the market did not expect this inflation to last indefinitely, which was an accurate expectation. The most interesting discovery in Figure 5 is the relationship between Treasury rates, which reflect the cost of debt capital, and the unsecured debt issued.

Sources: NAREIT and the St. Louis Federal Reserve – FRED

Before focusing on REIT capital, examining the relationship between inflation and Treasury rates offers some insight into the market at this time. From 2019 to 2024, the Treasury rate was persistently below inflation. Despite the period mismatch, this relationship is unusual and likely an indication that investors were strongly moving toward safety in the face of an increasingly uncertain future. This investor perspective certainly had an impact on REIT access to capital. Treasury rates rose during 2022 in a slower, less dramatic way than inflation, and this coincides with a minor reduction in equity capital and a major loss of debt capital.

The lack of correlation between inflation and Treasury rates during 2024 and 2025 reveals a surprising relationship. Even though Treasury rates set the cost of debt, the level of debt funding seems to more closely mirror the continued decline in inflation rather than hold with the unchanging Treasury. Over the past two years, inflation has fallen from 5% to 4% to 3%, but the Treasury rate has held steady between 4.0% and 4.5%. During this time, equity issuance grew by more than 15% and unsecured debt issuance rose by nearly 50%. This suggests that REIT access to capital is affected more by a change in the borrowing rate than the absolute level of interest. Capital market participants who waited for rates to fall before re-entering the market in 2024 may have misjudged the signal: It was the stabilization of the rate trajectory, not a meaningful decline, that reopened issuance windows.