REITs have been on a buying spree, making $67.8 billion of net acquisitions in 2021. Several factors have contributed to these purchases, including a robust recovery in underlying property markets and solid outlook for future growth, a low cost of capital, and strong balance sheets that are in a good position to support this expansion of their real estate portfolios. And while the war in Ukraine has injected new risks and uncertainties into the outlook, the factors that supported REIT acquisitions last year leave them well-prepared for the path ahead. (Full disclosure, I am Senior Economist and SVP Research Analysis at Nareit, the worldwide representative voice for REITs and listed real estate.)
As publicly listed companies, REITs often issue common stock to raise capital to fund their acquisitions. High and rising share prices decrease REITs’ cost of capital, and also generally signal market confidence in the future prospects for income-producing real estate. The 41.3% total stock market return by REITs in 2021 provided both a strong signal to expand and also low-cost access to the capital required to do so. Indeed, REITs raised a record $126.9 billion in 2021 through issuance of common equity, preferred equity, and unsecured debt.
REIT acquisition activity increased steadily through the year, to $26.7 billion in the fourth quarter. Activity was broad-based, with nine of the 12 property sectors having positive net purchase activity, according to the Nareit T-Tracker®. Self storage REITs and residential REITs led the way, with $7.0 billion and $6.2 billion net purchases, respectively. These property sectors have been red-hot during the pandemic. Other sectors with significant net acquisitions include retail REITs and health care REITs, with $5.5 billion and $2.8 billion, respectively. These sectors came under pressure in the early phases of the pandemic, causing disruptions that led to opportunities for repositioning and consolidation.
These acquisitions come at a time when REIT operating performance and financial performance are both on the upswing. Occupancy rates of all properties held by REITs rose to 92.3%, an increase of 325 basis points from the low point reached early in the pandemic, and have nearly returned to their levels preceding the pandemic. Across property sectors, occupancy has risen among the apartment, industrial, and retail REIT sectors, while occupancy rates have continued to decline in the office sector.
Financial performance has benefited as conditions in property markets have firmed and occupancy recovers. Indeed, after having declined in 2020, earnings of the REIT sector (as measured by funds from operations (FFO)) rose 24.6% in 2021 to a record high of $64.8 billion.
REITs have strengthened their balance sheets over the past decade, reducing their leverage and locking in low interest rates for well into the future. This solid financial position has not only facilitated the recent wave of acquisitions, but has also reduced exposures to possible increases in interest rates or other shocks in financial markets in the months and years ahead.