Non-listed REITs continue to expand their commercial real estate market presence. Non-listed REITs had a strong year in 2013 with $24 billion in commercial real estate acquisitions. A record equity capital raise of $20 billion by non-listed REITs in 2013 was a primary driver for the increase in acquisitions. While they have historically been significant investors in net lease assets, non-listed REITs have been expanding their investments in other real estate sectors over the past two years.
Non-listed REITs acquired $7 billion in office assets with $4 billion in multi-tenant office and $3 billion in single-tenant office. Investment leaders were Cole Corporate Income Trust with $2.1 billion, American Realty Capital New York Recovery REIT with $1.8 billion, and Hines Global REIT with $1.7 billion in 2013. Cole Corporate Income Trust focuses on single-tenant office properties, while American Realty Capital New York Recovery REIT and Hines Global REIT invest primarily in multi-tenant office properties.
Non-listed REITs also acquired $4 billion of medical office assets and $4 billion of retail assets. The leading medical office investors among non-listed REITs were Griffin-American Healthcare REIT II with $1.5 billion in 2013 acquisitions, American Realty Capital Healthcare Trust with $900 million, and CNL Healthcare Properties with $700 million. Medical office investments by non-listed REITs have focused on senior living facilities and medical office buildings.
Retail acquisitions by non-listed REITs were divided between single-tenant retail assets and multi-tenant shopping centers. Cole Credit Property Trust IV and American Realty Capital Trust V were the single-tenant retail investment leaders with $1.7 billion and $1.1 billion acquisitions respectively. Phillips Edison-ARC Shopping Center REIT was the multi-tenant retail shopping center investment leader with $900 million in acquisitions.
Non-listed REIT cap rates declined to 7.3% in 2013, which is their lowest level since the 2007 commercial real estate pricing bubble. Since their peak in 2009, non-listed REIT cap rates have declined by 19%, which reflects the rising commercial real estate prices over the last few years. Commercial real estate pricing markets are demand driven, and low interest rates on long-term financing are fueling the growing demand for core commercial real estate and its high leveraged equity yields.
Non-listed REIT cap rates vary significantly by commercial real estate sector. Apartment acquisitions had the lowest sector cap rates of 6.5% in 2013, as cap rates on class A apartments in strong primary markets are below 6.0%. Cap rates on industrial properties dropped to a low 6.8%, which is the second lowest sector cap rate for non-listed REITs. Medical office assets have had moderate cap rate declines to a relatively high 8.2% due to significant tenant and market risk on the majority of investments.
Retail investments had moderate 7.3% cap rates in 2013 with 7.1% cap rates on single-tenant retail assets and 7.8% on multi-tenant retail assets. Cap rates on single-tenant assets with strong credit tenants are approaching their lows of 2007. Cap rates on office acquisitions, which was the largest investment sector for 2013 non-listed REIT acquisitions, have now declined 10% to 7.5% in 2013. Higher cap rates on single-tenant office are pulling up the average cap rates on new office investments.
With their continued growth in equity fundraising, non-listed REITs will expand their presence in the largely institutional world of commercial real estate. Non-listed REITs have increased their commercial real estate diversification, but they’ll face challenges in finding strong performing assets at favorable prices in 2014. Many non-listed REITs will have to look at smaller markets and higher investment risks to generate sufficient equity yields to maintain their high distribution rates.
Article by Michael Stubben, President of MTS Research Advisors
MTS Research Advisors is a provider of data and analytics for non-traded REITs and BDCs.