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Research Firm Sees Difficult Path Back to Healthy Non-Traded REIT Market

Publicly registered non-traded REITs raised a total of $2.2 billion during the first two quarters of 2017, according to Summit Investment Research’s latest Non-Listed REIT Market Snapshot report. Non-traded REIT fundraising in 2017 is slower than last year, which posted the lowest annual equity raise in the last 12 years with $4.8 billion.

Summit cited concerns over regulatory changes and the departure of AR Global, previously the industry’s largest fundraising sponsor, for the equity drop, noting that “sponsors will need to adapt to regulatory changes and a market transition with revised product structures and reduced fees to return to long-term equity growth.”

Blackstone Real Estate Income Trust broke escrow in January 2017 and has raised a staggering $412 million in the second quarter, or 40 percent of the market share. Industrial Property Trust was the second largest fundraiser in the second quarter with $100 million raised. Griffin-American Healthcare REIT IV was not far behind with $95 million in equity raised in the quarter, followed closely by Carter Validus Mission Critical REIT II with $91 million raised.

Acquisition cap rates continued to decline for the eighth straight year in the second quarter to a low 6.1 percent, a 28 percent decline from 2010. Cap rate compression, which highlights commercial real estate price increases, is driven by interest rates on new debt. In the second quarter, average interest rates on new permanent debt increased from 3.7 percent to 3.9 percent.

In the second quarter, non-traded REIT occupancy rates remained 93 percent, unchanged from last quarter. The average remaining lease term for office, retail, and industrial assets dipped slightly to 7.8 years, compared to 8 years last quarter.

The leverage ratio for non-traded REITs increased to 42 percent, which Summit noted is comparable to listed REITs. Variable debt ratios remained a high 38 percent, unchanged since 2015. Non-traded REITs also have a high 36 percent short-term debt ratio.

Summit Investment Research was founded by Michael Stubben in April 2016 and covers non-traded REITs, business development companies, interval funds, and listed REITs (that acquired non-traded REITs or were once non-traded). The company’s research can be utilized by a variety of industry clients including financial advisors, registered investment advisors, broker-dealers, sponsors, service providers like law firms, due diligence firms, industry organizations, and news organizations, and institutions.

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