CHICAGO– REIT M&A volume soared to $140 billion in 2021, marking one of the strongest years on record. JLL’s Capital Markets M&A and Corporate Advisory group’s M&A and Strategic Transactions Monitor report details the themes contributing to this record-setting activity, including a significant growth in deal size and REITs as well as the emergence of new funds and Environmental, Social and Governance factors.
Driven by a total return of 43% for the year, and outpacing the S&P 500 by 14%, REITs across almost all major subsectors exhibited renewed optimism entering 2022. Led by retail, self-storage, industrial and multi-housing, all REIT sectors posted positive returns in 2021. Retail, which proved its resiliency in 2021, had an 88% gain over 2020, with self-storage second at 78%.
“While early, this year-to-date has seen broader markets down significantly, as persistently high inflation, an ensuing Fed rate hike and broader geopolitical risks have dominated headlines,” said Steve Hentschel, Head of the M&A and Corporate Advisory Group with JLL Capital Markets. “Despite the recent S&P and REIT performance, fundamentals support positive longer-term outlook for REITs, as the vast majority have consistently surpassed their Wall Street research analyst consensus quarterly FFO estimates over 2021. REITs also posted strong NOI growth and occupancy increases throughout 2021.”
REITs traded at an average premium of 11% to net asset value (NAV) and this favorable cost of capital resulted in robust equity issuance volume, topping $54 billion for preferred and common equity, which was above the 2019 and 2020 levels of $50 billion and $33 billion, respectively. Additionally, increased dry powder led to REITs acquiring close to $100 billion in assets in 2021, almost doubling the volume in 2020 of $54 billion.
This historic surge in REIT M&A volume was primarily driven by larger deals. The mix of M&A transactions led by strategic or private capital sources was $70 billion each to finish the year. The common theme binding the larger transaction size is the premium capital markets attribute to scaled platforms over the longer term. Currently, a median REIT owns approximately $4.5 billion of real estate, which is 50% more than the size of a median REIT in 2010.
“Average transactions in 2021 were $7 billion – nearly twice the size of deals from the prior decade – and mostly involved a smaller marketing process,” said Sheheryar Hafeez, Managing Director of M&A and Corporate Advisory Group within JLL Capital Markets. “As dry powder earmarked for commercial real estate investment continues to grow, there is a growing sense of urgency among large investors to deploy capital efficiency. It appears the strong appetite for large portfolio deals is here to stay.”
Larger REITs across every major sector have posted outsized total shareholder returns since 2010 when compared to the smaller REITs in the same sector. In addition, larger REITs have traded at a higher premium to NAV when compared to smaller REITs. The private capital sources are similarly motivated to deploying significant dry powder accumulated and large REIT M&A transactions are an efficient way to utilize the capital raised.
“The non-listed REITs alone raised over $11 billion in 2021 on a rolling three-month basis, led by Blackstone Real Estate Income Trust,” Hafeez added. “With new entrants entering the non-listed REIT space, we will likely see increased competition for large transactions, including REIT M&A.”
JLL tracked momentum around opportunities of scale, leading to more private investors perusing portfolio acquisitions. The fourth quarter, in particular, saw a sharp rebound in the number of transactions priced higher than $500 million, or “megadeals,” which was on par with the prior record set in 2019. Megadeal volume increased to $33.4 billion, 22.9% higher than the $27.4 billion transacted in 2019.
Inflation not expected to affect sector performance
Themes surrounding inflation emerged in both the public and private capital markets. A review of the last four Fed rate-hike cycles revealed moderately high inflation and strong economic growth occurred during each cycle, and sector performance can vary widely but REITs and commercial real estate on average posted positive performance across the analyzed periods. In addition, an analysis of Fed rate hikes and core commercial real estate yield based on data since 1982 found weak correlation. Though interest rates are not expected to reach harmful levels, volatility may impact the timing of deals; however, improving fundaments and rising NOI should limit major real estate price declines.
ESG emerges as a theme
The focus on Environmental, Social and Governance (ESG) factors has emerged in the private capital markets and is no longer seen as a trend but a structural revolution. Now a guiding principle for commercial real estate investment management, tenants and investors are making ESG part of their investment strategy and seeking opportunities within the built environment to bring sustainable change by supporting health, wellbeing, safety and security.
