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Modiv Sees Long-Term Growth Potential in Industrial Manufacturing

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Modiv Sees Long-Term Growth Potential in Industrial Manufacturing pconnors@reit.com Nov. 18 2022

Keith Loria

Keith Loria is a freelance writer and regular contributor to REIT magazine.

Modiv Sees Long-Term Growth Potential in Industrial Manufacturing

With its IPO earlier this year now in the rearview mirror, Modiv Inc.(NYSE: MDV), which traces its legacy to a real estate crowdfunding company launched in 2015, continues to evolve as it sharpens its focus on real estate assets net leased to industrial manufacturing and food production businesses.

Earthbound Farm
Earthbound Farm Organic’s cold storage facility in Yuma, Arizona. Photo courtesy of Modiv Inc.

With its IPO earlier this year now in the rearview mirror, Modiv Inc. (NYSE: MDV), which traces its legacy to a real estate crowdfunding company launched in 2015, continues to evolve as it sharpens its focus on real estate assets net leased to industrial manufacturing and food production businesses.

Until 2021, Modiv was known as Rich Uncles, an external manager of public, non-listed net lease REITs that raised all of its investment capital from individual retail investors.

“When I joined the company in 2018, my specific mission was to transform the company into an even higher quality investment vehicle worthy of being publicly traded,” says Modiv CEO Aaron Halfacre. “Within the first year, we were successfully able to merge two smaller REITs into one larger REIT, internalize the management team, and assemble a high-caliber board of directors. After that we then formally became Modiv.

Since that time, Modiv, whose name reflects its intent to provide investors with Monthly Dividends, has continued to take transformative steps to make itself a REIT worthy of investors’ dollars and respect.

In the early days, the company acquired net lease assets primarily in California and across all retail, office, and industrial property types.

Aaron Halfacre
Aaron Halfacre, Modiv CEO. Photo courtesy of Modiv Inc.

“As we have evolved, we have methodically reduced our office exposure, with an intermediate-term goal to have no office assets and to be focused nearly exclusively on acquiring industrial manufacturing and food production assets,” Halfacre says. “We differentiate industrial manufacturing from that of the more common industrial distribution sub-sector and believe our investment focus is unlike that of most of publicly traded REITs.”

Believing that the global pandemic and international conflicts have highlighted the vulnerability in the off-shore, just-in-time supply chain model, Modiv’s strategy involves the reshoring of manufacturing capabilities as a key long-term economic theme domestically and a primary investment strategy as it looks to the future.

Working Toward Pure-Play

Despite its focus on industrial manufacturing and food production assets, as a legacy portfolio Modiv has not yet become a pure-play portfolio as it continues to hold retail and some office assets

“The majority of our portfolio is industrial, and we expect it to be the vast majority in a relatively short window of time,” Halfacre says. “The change in the portfolio, which is really the next logical step in our transformation, is the result of disciplined asset sales and purchases.”

From an acquisition perspective, the company seeks tenants who are producing meaningful products to the U.S. economy, with a particular focus on infrastructure and core demand goods that are less susceptible to consumer discretionary volatility.

“When we identify tenants with the right profile, we then look to make sure that the particular property we are underwriting is critical to that tenant’s business and that it is very unlikely for the business operations to be relocated,” Halfacre says. “From there, we dig deep into the credit of the tenant’s business to ascertain their financial strength and long- term ability to pay rent on the asset we are acquiring.”

Once the analysis of the tenant is completed, Modiv financially models the rental scenario and forecasts it into a full balance sheet and income statement to see how that individual property would change the nature of its overall financial profile.

Archbold, Ohio
Archbold, Ohio: leased to Arrow Tru-Line, Inc., a leading manufacturer of hardware components to the North American overhead garage door market. Photo courtesy of Modiv Inc.

“We make sure each acquisition is accretive and our focus on accretion is based on fully diluted AFFO per share growth over a minimum three-year horizon,” Halfacre says

Unlike industrial distribution properties that can, and are, readily built on a speculative basis, the industrial manufacturing facilities Modiv looks to acquire often have been in existence for decades and were purpose-built for the business operations that are housed in them.

“Most of these facilities have large industrial equipment that is not readily relocated, and the job force employed at these facilities tends to be highly specialized,” Halfacre says. “Given the sticky nature of these properties, the markets where they are located determine which geographies we purchase. Many of these facilities are in the less urban regions across the U.S. where manufacturing businesses are welcomed.”

For example, Modiv is more likely to own assets in Columbia, South Carolina or Waco, Texas than in downtown Los Angeles or any other high-density metropolis.

Recent Deals

Year to date, Modiv has acquired more than $90 million in industrial manufacturing properties, including the $56 million purchase and leaseback of Lindsay Precast assets and the $23 million purchase of Valtir assets.

Lindsay is a leading precast concrete manufacturer and metals fabricator with a 60-plus year business history, Halfacre notes. “We acquired a five-state portfolio of their manufacturing locations, strategically located to their clients to reduce the shipping costs of the large-scale projects they manufacture.” He adds that Valtir, a leading producer of highway steel guardrails, sold Modiv a four-state portfolio of their manufacturing facilities. Both acquisitions were acquired with long term leases and with favorable annual rent escalators.

3M Facility
3M distribution center on the western edge of the greater Chicago MSA. Photo courtesy of Modiv Inc.

One of the unique challenges of focusing on single-tenant properties, Halfacre notes, is properly balancing tenant credit quality and real estate quality.

“Sometimes you will find net lease real estate investors buy superior real estate locations with inferior quality tenants— taking the long-term view that they can always find a new tenant for a great location,” he says.

“Conversely, sometimes you will find net lease buyers choosing a high-grade tenant even if the real estate quality is subpar— taking the long-term view that the tenant will never leave so the location isn’t as important. We, like every sophisticated buyer, attempt to balance the two facets of value in hopes that we do not take on undue risk with tenancy or the location.”

And that’s best done through exhaustive due diligence. Halfacre and other members of the Modiv team personally visit every asset they are considering acquiring.

“We conduct both internal and external credit analysis of each tenant, and we gather as much market and tenant data as we can,” Halfacre says. “We then blend that with our years of experience and our intuition to make sure we have as accurate a read as possible on the investment opportunity at that time. Even with all the advances in modern real estate investing over the past century, buying real estate is still considered an imperfect science at best.

Attracting Investors

Like the vast majority of other net lease REITs, Modiv performed well during the COVID pandemic, achieving 100% occupancy and rent collection with the exception of one isolated asset

“That said, I think COVID did provide us a robust crystal ball into which assets we liked and disliked owning. Since that time, we have sold numerous assets that are not key to our long-term investment strategy.”

When Halfacre speaks with investors, he attempts to convey the ethos of Modiv—that its character is built upon candor, transparency, hard work, pragmatism, self-discipline, and a relentless pursuit of becoming better for all of its stakeholders.

“Buying and selling real estate is simple and in the grand scheme of things, not all that important—we are not saving lives—and it seems to me that anyone with a small sum of money can do it,” he says “However, we strive to do it with the highest of values, doing it with a clear ethical compass.”

Bryan Maher, managing director for B. Riley FBR, has been impressed with Modiv’s start since going public.

He notes that adjusted funds from operations per share beat estimates in each of its first two reports as a listed company, and the REIT continues to make positive moves recycling capital out of office and into industrial manufacturing. “Given the mission-critical nature of industrial manufacturing assets to the tenants, we find tenants at these properties to be materially more ‘sticky’ than office and certain other real estate classes.”

As a smaller REIT, “management has a better opportunity to materially move the earnings needle versus many much larger REITs on a relative basis,” Maher says.

What Halfacre hears the most often from investors is that people are attracted to the quality of the management team. “I am proud to work with a team of colleagues that has so much real estate, REIT, and public market expertise,” he says. “In so many ways, the management team we have assembled, as well as our outstanding board of directors, means that Modiv punches far above its proverbial weight class.”

After the management team, Halfacre feels the next biggest selling point is the company’s focus on industrial manufacturing and food processing assets.

“It is a pure-play strategy that seems to resonate in the marketplace,” he says. “Finally, I believe our small size is appealing to many investors as we are poised for growth, and we will benefit from a small denominator as we continue to grow.

Looking Ahead

As the company looks to its future, Modiv plans to continue to grow by making disciplined investment decisions in its target asset classes and actively managing its investment portfolio.

“As a small REIT, our challenge is to grow through accretive acquisitions,” Halfacre says. “I know of no real secret sauce other than hard work, a ton of thought, and a focus on the first principles. Growth is in our DNA, coasting is not, so I am not worried about our growth as I am focused on the variables that we can control and being prepared for those that we cannot. We have a highly experienced team, disciplined underwriting, a solid portfolio, and a tremendous acquisition pipeline. I believe strongly in our future. Modiv is positioned to deliver long-term growth for our investors.

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Sector Spotlight: Self-Storage

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Sector Spotlight: Self-Storage pconnors@reit.com Nov. 18 2022
Sector Spotlight: Self-Storage

The COVID-19 pandemic disrupted people’s lives in fundamental ways. Many people were suddenly working or attending school remotely, and spare rooms previously used for storage became offices and classrooms.

Self Storage Center


The COVID-19 pandemic disrupted people’s lives in fundamental ways. Many people were suddenly working or attending school remotely, and spare rooms previously used for storage became offices and classrooms.

The repurposing of space at home helped fuel a need for additional storage space, as did the subsequent housing boom: Many renters became homeowners, and many homeowners found that their life situations and needs had changed.

Whether moving to the suburbs, downsizing, or retiring, people need clean and secure storage space. Addressing the need for storage space generated by these conditions are self-storage REITs.

In every quarter since the beginning of 2010, self-storage REITs have been net acquirors of real estate, and the operational performance and returns of the sector reflect the consistency and demand for the product they offer.

Self-storage REITs paid out $2.7 billion in dividends in both 2019 and 2020, $3.0 billion in 2021, and have paid $1.8 billion through the second quarter of this year.

Sector Spotlight Stats

 

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Nuveen’s Carly Tripp Sees Increased Allocations to Real Estate

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Nuveen’s Carly Tripp Sees Increased Allocations to Real Estate Kyle Gustafson Nov. 18 2022

Clay Risher

Clay Risher is a freelance writer and regular contributor to REIT magazine.

Nuveen’s Carly Tripp Sees Increased Allocations to Real Estate

Nuveen’s Global Chief Investment Officer and Head of Real Estate, Carly Tripp, sat down with REIT magazine to discuss not only some of the challenges real estate and capital markets face during tumultuous economic times, but also some of the opportunities that might arise as a result of the inevitable downturns, disruptions, and highly volatile nature of a global economy.

Given the uncertainty across markets today, does real estate still hold the same value for investors?  

Surveys of institutional investors continue to show an expectation for increased allocations to real estate, suggesting they continue to view the sector as having attractive returns prospects, particularly on a risk-adjusted basis. We agree with that notion.  

When it comes to managing volatility, do you still see real estate as a relatively stable investment?

Private real estate, equities, and public REITs all deserve a place in an investor’s portfolio. Each accomplishes something different. Real estate has delivered returns above inflation more consistently and had fewer or less severe drawdowns, which allows your capital to compound at a greater rate.

While there are near-term macro headwinds, these headwinds, like central bank tightening, higher rates, inflation, and geopolitical risk aren’t unique to real estate, and the strong fundamentals of certain sectors like industrial and housing could help real estate weather the storm.

What sectors will prove to be worthwhile investments in highly inflationary times? 

We’d note that real estate generally offers an inflation hedge when markets are tight and landlords accordingly have pricing power. One benefit of the last few years was that supply chain issues helped keep a lid on new construction. As a result, globally, fundamentals are pretty strong.

This is particularly evident in residential and industrial markets, where greater than 75% of markets across the United States, Asia Pacific, and Europe all have vacancies today below their long-term average. In the U.S., all of the 50 largest industrial markets have vacancies today below their long-term average. For apartments, it’s 43 of the top 50 markets with vacancies below equilibrium. Retail has lower vacancies today in 42 of 50 markets, with particular strength in neighborhood retail.   

Which trends brought on by the pandemic are now starting to fade and where do you see growth opportunities going forward? 

Working from home obviously reached a peak during the pandemic, but we are continuing to see an increasing number of employees returning to the office. While we don’t expect to get back to pre-pandemic levels of in-person office attendance, it is noteworthy that we are seeing some office markets with leasing activity above pre-pandemic norms, mainly in the Sunbelt and in biotech markets like Boston.

The retail sector had a particularly strong run during the pandemic, with more store openings than store closings for the first time since 2016. Most malls continue to struggle, as have urban retailers in central business districts reliant on office tenants, but local retail such as community and strip centers have record low vacancy rates with little supply underway.

In a downturn, all retail gets hurt, but these centers have somewhat proven their resiliency over the course of the pandemic. The pandemic also further unlocked migration within the country, which we believe continues to provide an additional boost to lower cost-of-living markets, although true “Zoom towns” are starting to see some weakness as folks get called back to the office.  

Do you think the housing market is now correcting?  

Carly Tripp
Carly Tripp is global chief investment officer and head of investments for Nuveen Real Estate, a leading investment manager with $156 billion in assets under management. Globally, Tripp leads a team of 300-plus investment professionals.

The most concerning headwind to near-term home price appreciation is the rapid decline in affordability due to higher mortgage rates and resilient home prices. With that said, existing homeowners, perhaps not prospective first-time home buyers, should have reasons to be optimistic that any near-term adjustment in home prices may be more modest and slow-moving than past pockets of housing weakness—with some regional differences aside.  

What correlation are you seeing between public and private real estate? 

Public real estate is a useful leading indicator for private real estate, with a fairly strong correlation to private real estate price movements on a two-quarter lag. However, corresponding price changes in private real estate are typically a fraction of the public markets.

Private values adjust more slowly, but as a result they don’t overshoot so far in each direction.

Although it is now a talking point that REIT values have fallen during 2022 while private real estate values have continued to climb, we’d note that public REITs are still up 31% relative to the first quarter of 2020 while private real estate values are up just 27% over the same time period.  

In your latest market report, you espouse the virtues of the self-storage sector. Why?

Self-storage sector has among the lowest capital expenditures as a percent of net operating income, resulting in higher total returns. There is also built-in inflation protection as shorter rental durations and monthly leases allow for frequent rate changes, providing a hedge against inflation. 

The sector’s demand drivers such as life events, moving, and downsizing are uncorrelated to the broader economy and perform well across economic cycles. Overall, sector usage continues to increase with millennials as the largest tenant cohort and COVID-19 leading remote workers to convert part of their homes into offices, thereby creating the need for self-storage.

Looking outside the U.S., where do you see investment potential?

While we think the U.S. economy is particularly resilient, there are many global opportunities we like. For example, European suburban housing, namely apartments and single-family rentals, where the industry is still in the early stages of institutionalization. There is an increasing preference to rent across the region, while favorable demographics are apparent in the Netherlands and the Nordic countries.

European data centers are also interesting. Data storage requirements are growing at an exponential rate and demand for space is at all-time highs. Secondary markets, meanwhile, are seeing less construction.

Senior living facilities in Tokyo, meanwhile, offer a fragmented market with demographic tailwinds.

What types of PropTech will have the greatest impact on real estate?

PropTech continues to represent significant opportunities for real estate in the short and long term. We saw record levels of new startups, venture capital funding, and M&A activity in 2021 and early 2022, and although the choppy macro environment has slowed many of those indicators during the second half of this year, PropTech remains on the shortlist of strategic priorities as we head into 2023.

The PropTech market is broad and includes technologies in various stages of maturity, so there are many opportunities for technology to make an impact today, while continuing to be a driving force that shapes the industry’s future. 

Data and sustainability are two of the most significant PropTech trends relevant to real estate today. Software tools and data strategies that enable investors and operators to make better decisions will have significant near-term impacts for firms that embrace them. Similarly, technology will play an outsized role in real estate’s ability to decarbonize and achieve sustainability goals in the coming years.

Although net zero carbon timelines span years, often decades, PropTech is critical to benchmarking carbon footprints today. Measurement is the key first step to real estate’s decarbonization journey.

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4 Quick Questions with RailField Partners’ Kenneth Bacon

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4 Quick Questions with RailField Partners' Kenneth Bacon Kyle Gustafson Nov. 18 2022

Sarah Borchersen-Keto

Portrait of Sarah Borchersen-Keto

Sarah Borchersen-Keto is Nareit’s editorial director and writes extensively for Nareit’s website and award-winning magazine, REIT: Real Estate Investment Today, and Nareit's website.

4 Quick Questions with RailField Partners' Kenneth Bacon

Kenneth Bacon is the co-founder and managing partner of multifamily investment and asset management firm RailField Partners.

Kenneth Bacon


Kenneth Bacon is the co-founder and managing partner of multifamily investment and asset management firm RailField Partners. A former Fannie Mae executive, he also serves as board chair at Welltower Inc. (NYSE: WELL).

How would you describe fundamentals in commercial real estate today?

Some sectors are hurting because of changes occurring in the economy. That’s a challenge, not only for the industry, but also for policy makers who have to rethink zoning. Policy makers are also going to have to rethink tax policy to get some of these assets productive again, such as empty office buildings.

Meanwhile, now that we’re getting back to a more normalized investment ecology, with rising interest rates, investors will have to work a lot harder to get returns. Some deals are just not going to happen.

Do you have concerns about the availability of workforce and affordable housing?

When we say workforce and affordable housing, many people think it means lower income families. But if you look at the data, you’ll see that young professionals, people earning six-figure salaries in cities like San Francisco and New York, are hard-pressed to find quality housing they can afford.

The supply side is very hard to change in the short term. The entitlement process, in terms of time and cost, has almost doubled over the past 15 to 20 years. It’s a huge expense that has an adverse impact on supply, and something the industry and policy makers must address.

Have the responsibilities and objectives of the board shifted in the last few years?

Investors and employees want companies to address social and political issues. As a result, the board has to put these items on the agenda. It’s changing the job of the board, and also the CEO, because what used to be viewed as an occasional crisis, such as voting rights, abortion, and immigration, is now becoming the norm due to an expanded slate of stakeholders.

Where could the real estate industry be doing a better job?

The industry needs to pay attention to the trends around how and where people want to live and work, and should be more involved and proactive with policy makers. We might have to explain that, for example, affordable housing doesn’t just mean the homeless; it’s about getting schoolteachers, policemen, and civil servants a place to live. And to do that, we have to have a better process. To get a handle on increasing rent, our industry needs to do a better job explaining the economics of the business and how public policy and tax policy affect the average consumer. And we need to get our own house in order. It’s hard to speak to an increasingly diverse electorate when our industry doesn’t look like the rest of America.

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BXP’s The Hub on Causeway Reconnects Boston Community

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BXP’s The Hub on Causeway Reconnects Boston Community pconnors@reit.com Nov. 18 2022

G. Gage

G. Gage is a freelance writer and regular contributor to REIT magazine.

BXP’s The Hub on Causeway Reconnects Boston Community

Since its opening in 2019, The Hub on Causeway has become one of Boston’s fastest-growing neighborhoods and entertainment destinations thanks to its unique mix of a historical city backdrop and an expanding list of offerings for newcomers and long-time residents.

The Sky Lobby at 100 Causeway Street.
The Sky Lobby at 100 Causeway Street provides dramatic city views as well as indoor and outdoor gathering spaces for building clients and visitors. Photo courtesy of BXP.

Since its opening in 2019, The Hub on Causeway has become one of Boston’s fastest-growing neighborhoods and entertainment destinations thanks to its unique mix of a historical city backdrop and an expanding list of offerings for newcomers and long-time residents.

A joint venture between BXP (NYSE: BXP) and Delaware North, it sits atop the northern gateway to the city of Boston at North Station—a 1.5 million square feet mixed-use development that adjoins the iconic TD Garden arena.

The $1.1 billion BXP development includes 100 Causeway Street, Boston’s first ‘TAMI’ tower designed specifically for tech clients and anchored by Verizon Communications. The complex also includes a 272-key citizenM hotel; a 440-unit luxury residential tower called Hub50House with Boston’s highest rooftop pool; the city’s largest supermarket; 18 eateries in the Hub Hall; entertainment venues and onsite parking.

The Hub bridges some of Boston’s oldest neighborhoods and the culture and history of its iconic sports teams, while finally realizing the full potential of the city’s main transportation corridor.

“This was a zone that was almost like a missing tooth between the famous Italian North End and the West End, a historic neighborhood that became a victim of failed urban renewal,” says Bryan Koop, BXP’s executive vice president for the Boston Region.

“We saw it as an opportunity to connect these neighborhoods and finally synergize them.”

Finding the Next Innovation Hub

The HUB50 House
View of Hub50House, the residential component of The Hub on Causeway, and 100 Causeway Street. Photo courtesy of BXP.

Other potential developers had looked at the underutilized Causeway Street site, which historically had been a ghost town on days without TD Garden events, and only envisioned a regional type of retail experience. BXP, meanwhile, had a broader vision.

“We believe that great space and place drives behavior,” says Koop, who more than a decade ago saw the potential in the Boston market for growth in life sciences and TAMI (technology, advertising, media, and information sectors.) Using the then-emerging Meatpacking District in New York as an example of an ideal neighborhood for attracting this workforce due to its neighborhood amenities and access to transportation, Koop and his team searched Boston for a similarly situated area that had the potential for comparable growth.

They found their ideal spot right on Causeway Street situated at the TD Garden, home to the Boston Celtics, Boston Bruins, and touring concert acts. In addition to being Boston’s largest indoor venue, the location was also a transportation crossroads at North Station, which connects 64% of public transit trains in Massachusetts.

For close to a decade, BXP partnered with the city’s Boston Planning & Development Agency (BPDA), formerly known as the Boston Redevelopment Authority (BRA) over the course of two different mayoral administrations, to make the project a reality.

“Both mayors were incredibly supportive of the project because they saw the potential for building a sustainable transportation hub property and putting density in a place where all the transportation was,” Koop says

They also worked with the Downtown North Association (DNA), a nonprofit coalition representing the business, institutional, professional, hospitality, and residential interests in the North Station area and the West End. The purpose of the Association is to “encourage and contribute to the continued economic, social, and physical revitalization and redevelopment of the Downtown North/ West End community as a whole.”

TD Garden
The new, larger entryway into TD Garden. Photo courtesy of BXP.

In 2018, BXP found its tech anchor when Verizon signed a 20-year lease to anchor the new tower at 100 Causeway St. with 440,000 square feet accommodating up to 3,000 employees of the telecommunications firm.

The tech tower and accompanying amenities also attracted Rapid7, a fast-growing cyber security company that provides solutions across cloud security, threat intelligence, vulnerability management, detection, and response. The company leased 147,000-square-feet of The Hub for its new headquarters.

“Our decision to make The Hub on Causeway our Rapid7 home allowed us to create incredible workspace for our colleagues in a truly dynamic location while also having a positive impact on an emerging Boston neighborhood,” says Corey Thomas, CEO of Rapid7.

BXP took their vision for serving the TAMI community further by creating Flex by BXP, a versatile office leasing scheme that provides clients with short-term, modular, plug-and- play space solutions in an open concept environment where work stations can accommodate different businesses.

“We don’t see Flex as a coworking space,” Koop says, “it’s a flexible work space that can be leased on a monthly or yearly basis so it’s a great shock absorber to our larger clients or an incubator for small tech start-ups. It’s proven to be incredibly valuable in this office space market, post pandemic.”

Creating a Vertical Village

A lounge at Hub50House
A lounge at Hub50House. Photo courtesy of BXP.

Beginning in the late 1950s, the city began a controversial urban renewal program that would ultimately raze the West End neighborhood of Boston and in the process displace 20,000 people from the close-knit community. In developing The Hub on Causeway, BXP and their partners wanted to fill a hole left for decades that followed the demolishment of the historic West End while also respecting the current community’s needs. They worked with the West End Museum and its team to understand that important history.

Meanwhile, a variety of community benefits were provided as part of the development. BXP and its partners at Delaware North accelerated payments due for affordable hous - ing in order to assist in the development of The Beverly, an income-restricted residential development in the neighborhood. BXP partnered with the City of Boston and agreed to fund the investment before making the decision to move forward with the construction of Hub50House.

In designing The Hub, BXP included a Community Room in its East & West Podium area in order to provide meeting space for neighborhood groups and non-profits, like the local historic group and other community meetings. The room is fully-adaptable with audio visual equipment, mobile furniture, and plans for a local artist-designed mural inside.

Part of bridging two historic Boston neighborhoods, West End and the North End, included bringing in a basic amenity that had been missing from the neighborhood for decades. In 2019, The Hub opened the largest Star Market grocery store in Boston after years of community demand.

BXP worked with The Grocery Store Committee, also known as North End/West End/ Beacon Hill Super - market Committee, a group of neighbors and citizens who advocated for 20 years for an accessible, affordable grocery store in the food desert neighbor - hood. The committee worked tirelessly to bring a new supermarket into the area around the West End, North End, and Beacon Hill neighborhoods, but the spaces that were available never had the right square footage and layouts for a traditional market, as well as the space to accommodate shipment unloading.

Communal lounge space at Hub50House
Communal lounge space at Hub50House. Photo courtesy of BXP.

“This neighborhood, which was growing leaps and bounds in population and deserved the same thing that any residential community in the suburbs would have in Boston,” says Koop, who says he was inspired by the Grocery Store Committee’s dedication. “We went after this vision and made sure we got the best in Star Market, which is home grown originally out of Boston.

Using an innovative design that allows the market to have a small footprint in high traffic areas at street level where commuters are moving through North Station and fans are attending events at the TD Garden, the 60,000- plus square foot store utilizes underground space that is also accessible directly from the parking garage. The project took years of expert engineering designs to accommodate the unique space in The Hub complex and maximize the potential of the store.

The Grocery Store Committee embraced the partnership, welcoming the accessible design that better accommodates families who would want to live in the neighborhood, but previously would have found it challenging due to the lack of a basic necessity. To celebrate the partnership, the Grocery Committee sat in on the official signing of the lease by Star Market and BXP, and committee members were also invited to sign the lease themselves as a gesture of their years of advocacy for the community to bring about this project.

“This store wouldn’t exist if it weren’t for the Grocery Committee,” Koop says.

Activating Entertainment

Koop recalls that one of the initial draws of the location was the rich history surrounding the TD Garden and the city’s sports teams. The original Boston Garden was built in 1928 and demolished in 1998, after the new venue was built next door, but for 20 years the original land sat vacant despite all of its potential.

BXP chose global architecture firm Gensler to design the mixed-use development comprising the office tower, residential tower, and retail gallery connecting North Station and TD Garden.

The lobby at 100 Causeway Street
The lobby at 100 Causeway Street. Photo courtesy of BXP.

They utilized sustainable, modern design elements with steel and glass but also made sure the architecture helped connect the neighborhood with its industrial past.

“We wanted to create the most sustainable three acres in Boston,” Koop says, with components such as the office tower LEED-certified platinum. “Its carbon footprint is also fantastic because of this transportation hub.”

TD Garden had long lacked a central entrance; instead, patrons and commuters were forced to enter and exit through smaller traditional doorways that often led to confusing long lines and pedestrian back-ups. The Hub now welcomes patrons with a larger grand entryway that allows easier access to transportation and the TD Garden. Visitors can easily visualize the new offerings like Hub Hall, a food and drink hall with 18 different vendors and spend time in the neighborhood outside of Garden events.

BXP partnered with local entertainment guru and Boston native, Ed Kane, to further activate the entertainment possibilities of the area. Kane is principal of Big Night Entertainment, a Boston-based full service, hospitality and entertainment company with 23 locations ranging from nightclubs, restaurants, and music halls, to bowling alleys.

In 2019, Kane opened Big Night Live, a 2000-person music hall and event space with Tequila Cocina, a restaurant concept by celebrity chef Guy Fieri. The venue employs more than 200 people and hosts roughly 250 shows a year, many of them sold-out, further bringing business to the new and surrounding retail. Kane says the additional convenience of having a boutique hotel like citizenM Hotel onsite (located on top of North Station) helps accommodate the top talent playing at Big Night Live, as well as the fans coming to town for the shows

“BXP was so fantastic to work with—they’re thoughtful and creative. You always get the sense that it is a true partnership,” Kane says, “so in this case we worked together to think about what would bring the best value to the neighborhood.”

For Kane, who grew up in the Dorchester area of Boston and attended sports events at the original Boston Garden, The Hub is a homecoming for the neighborhood. Kane sees The Hub as more than just a place for visitors coming for the sporting events.

“Finally, this is a neighborhood again. This is a place to go. The Hub brought everything together,” says Kane.

According to Koop, that’s one of the reasons The Hub is a perfect example of BXP’s broader approach to development. Thoughtful placemaking benefits both clients and communities.

“The business we’re in is not real estate,” Koop says. “We are in the business of creating great spaces with the best amenities and connectivity that power progress for our clients.

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Public Storage’s 50-year Evolution into the Self-storage Giant

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Public Storage’s 50-year Evolution into the Self-storage Giant Kyle Gustafson Nov. 18 2022

The company’s brand with the bright, roll-up orange doors and simple name has become synonymous with the self-storage industry as it marks its 50th year in business.

Opportunity Orange

The company’s brand with the bright, roll-up orange doors and simple name has become synonymous with the self-storage industry as it marks its 50th year in business.

Ringing the opening bell of the New York Stock Exchange on Sept. 30.
Ringing the opening bell of the New York Stock Exchange on Sept. 30. Photo courtesy of Public Storage.


Fifty years ago, the founders of Glendale, California-based Public Storage (NYSE: PSA) knew they were onto something big when they discovered the then-relatively new self-storage niche. However, they may not have predicted just how massive the business would become.

Today, the company’s brand with the bright, roll-up orange doors and simple name has become synonymous with the self-storage industry as it marks its 50th year in business. It’s widely recognized as the largest self-storage owner/operator in the world and among the largest publicly traded REITs by market capitalization at $52 billion.

Last year was one of Public Storage’s most successful years, reporting unprecedented rental rates and occupancy due to the pandemic-era boom. Self-storage ranked among the top-performing asset classes during the health crisis, as more Americans chose to store their extra belongings as they reevaluated their living conditions, moved, downsized, and decluttered. Storage space rented quickly, buoying storage stocks.

Self-storage remains in high demand by both customers and investors as billions of dollars has flowed into the space. Public Storage has reaped the benefits. In 2021, its revenue was $3.4 billion, a 17% increase over the previous year’s revenue of $2.9 billion.

Despite massive growth, Public Storage started small when B. Wayne Hughes and Kenneth Volk, Jr., each put up $25,000 to launch the business at a time when the concept of self-storage was somewhat novel. The two met in the 1970s when Hughes was an executive vice president and top producer at a real estate investment company, and Volk was ready to sell his development company, Volk-McLain Communities, Inc. Hughes oversaw the sale of the assets.

The two became friends and wanted to partner on some entrepreneurial endeavor. When Volk stumbled upon a small storage facility in Houston, which had a waiting list, their plan was set in motion. 

Public Storage’s first facility opened along a busy freeway in El Cajon, California, in 1972. The grand opening was a fiesta-themed celebration complete with a mariachi band. Their first customer was an STP Motor Oil distributor, who desperately needed somewhere to store the oil cans piled up in his driveway.

While the look of storage has changed over the past 50 years, the original concept remains.
While the look of storage has changed over the past 50 years, the original concept remains.

“We built No. 1 and took it from there,” the late Hughes recounted in a book about Public Storage. By 1974, the company had 20 locations. Their philosophy was to continue developing properties until they stopped filling up. Fifty years later, that still hasn’t happened.

Public Storage became a REIT in 1995 and joined the S&P 500 in 2005. In 2006, it acquired Shurgard Storage Centers, Inc., a leading owner/operator of self-storage facilities. Today, the company boasts more than 2,800 facilities across 40 states in the U.S., totaling approximately 200 million square feet, and 224 facilities in Europe.

Public Storage has roughly 1.8 million customers, 80,000 to 100,000 move-ins a month, and more than 5,000 employees. It continues to grow through aggressive acquisitions and a robust development platform.

‘Classic Story’

Joe Russell, Public Storage president and CEO, describes the REIT’s origins as “a classic entrepreneurial story and a new idea.”

When Hughes and Volk partnered to launch that first facility, Russell says, “this was a product type that had no anchor or visibility to the customer base.” A lot of time and energy went into trying to determine if people would really pay to put stuff into a garage space. “How do you design it? What are the attributes from a location standpoint that make sense? Like any formation of a new entrepreneurial endeavor, there was lots of trial and error,” he adds.

Russell notes that the inherent beauty of the product is its simplicity. “It’s a garage space or a cubic box, and it’s very compelling because time and time again, in and out of economic cycles, and in and out of all kinds of demand and fluctuation, it remains a resilient, extraordinary business,” he explains.

Joseph Russell, Jr., Public Storage President and CEO
Joseph Russell, Jr., Public Storage President and CEO. Photo courtesy of Public Storage.

Russell says the founders, followed by the company’s second CEO and current Chairman Ron Havner, took a creative approach that led Public Storage through massive growth, consumer awareness, branding, and determined industry leadership. “It’s just a great story,” Russell notes. “And we’re keeping a very keen eye on that history as a company because many of the things that led to our initial success are still with us today. That includes thinking about fresh perspectives that drive the business and continuing to improve the platform.”

Multiple Generation

Self-storage has evolved from locations on the outskirts of town to climate-controlled, state-of-the-art facilities in high-profile locations near urban centers. They’re bright, modern, landscaped, and amenity-filled.

“Many of the assets we own, we’ve developed over the last 50 years, so we’ve elevated our design and location attributes to what we call a generation five standard,” Russell explains.

Generation one was simple drive-up spaces, where customers entered through a gate, drove up to the unit, and rolled up the door. Facilities were 30,000 to 50,000 square feet, single story with 300 to 400 units.

In generation two, Public Storage started making units bigger and properties more dense. Generation three transitioned to multistory with added amenities like climate control.

Generation four was more multistory facilities with improved customer access, more space sizes, more security, additional elevators, and more climate control.

“Our fifth generation is even more polished and finished and provides more amenities,” says Russell.

The company has properties as large as 250,000 square feet in dense, highly-populated areas. Its tallest building is in the Bronx and was a conversion of a 12-story warehousing and parking building. The company has a redevelopment planned in Los Angeles that will be a couple stories higher.

Depending on the location and demand, the company will build very dense. Some facilities have 4,000 plus-units including one outside of Manhattan that’s a full city block. Public Storage owns prime real estate in markets like Los Angeles, San Francisco, Miami, and New York. The company also continues to develop its more traditional model in smaller, less-dense markets.

Recession Resistant

Self-storage has long been praised as recession resistant with a history of profitability, even during the toughest economic times. Customers have a continual need for storage as they move, downsize, divorce, land a new job, or lose a job. Those constant, relentless qualities attract investors to the space.

Self-storage is fueled by the four “D’s:” divorce, death, dislocation, and disaster, which play out in life, regardless of the economy. Through the pandemic, a fifth ‘D’ emerged, which is decluttering.

“COVID created new demand drivers for self-storage with accelerated usage and adoption of the product,” says BMO Capital Markets analyst Juan Sanabria. “That included people spending more time at home and creating more space for a home office, gym, or classroom.”

The pandemic also drove dislocation. “There was an uptick in housing turnover as people looked to move from the cities to the suburbs,” Sanabria notes. “These factors created strong outside demand for self-storage, resulting in rising occupancy rates, which allowed the operators to pass along larger and more frequent rent increases than in the past.”

Russell notes that these pandemic-related customers are staying in place, recognizing the convenience and cost benefits of self-storage. Today, more than 10% of all U.S. households rent self-storage units, according to the Self-Storage Association.

Additionally, as housing costs soar, people are looking for smaller, more affordable living spaces and need to store extra belongings. Businesses are also key storage tenants. With more companies contemplating permanent remote work, they’re downsizing or eliminating offices, boosting the need to store furniture and files.

“Over the last couple of years, we hit occupancy levels that frankly we had never seen before,” Russell points out. “Certain markets and assets reached 97, 98 and even 99% occupancy levels.”        

For Public Storage’s second quarter of 2022, same-store occupancy was 95.8%, down from 97% year over year. Same-store revenues jumped 15.9% over the previous year while same-store net operating income (NOI) increased 17.8%.  

Public Storage Leadership
The Public Storage leadership team, including President and CEO Joseph Russell, Jr., Senior Vice President and CFO Tom Boyle, Senior Vice President and Chief Administrative Officer Natalia Johnson and Senior Vice President, Chief Legal Officer and Corporate Secretary Nathaniel Vitan. Photo courtesy of Public Storage.

Fueling Growth

Self-storage remains a fragmented industry with less than 20% of square footage owned by REITs, and a majority owned by small operators. Public Storage, which owns roughly 10% of the total self-storage square footage in the U.S., continues to expand. Since the beginning of 2019, it invested $7.4 billion in acquisitions, development, and redevelopment, adding 38 million square feet to its portfolio.

The company has been on a recent buying spree, acquiring $5.1 billion in assets in 2021, roughly 30% of the entire industry volume. Its acquisition strategy involves finding attractive deals, rebranding the properties, and using its competitive advantages to enhance operations where previous management struggled.

Deals have included the $1.8 billion purchase of ezStorage’s 4.2 million-square-foot portfolio and the $1.5 billion acquisition of All Storage’s 7.5 million-square-foot portfolio. Russell anticipates up to $1 billion in acquisitions this year.

Industry observers anticipate that these acquisitions will enhance the company’s revenue growth.

“Public Storage has been an aggressive acquirer over the last couple of years and now has a very large pipeline of properties outside its same-store pool that represents about 25% of its revenue,” says Michael Goldsmith, analyst at UBS. “As this collection of properties matures, it should drive revenue growth.”

As for development, the company has an approximately $1 billion pipeline.

“They’re a big developer and really the only public self-storage REIT that develops in any meaningful way on balance sheet,” Sanabria says. “To the extent that there’s any dislocation in the acquisitions market, which has been an important driver of growth for the subsector, they can develop assets on balance sheet accretively and not worry about finding those external opportunities to consolidate the sector. That’s a unique proposition.”

Another avenue of growth is Public Storage’s third-party management business launched in 2018. It has roughly 175 facilities under management, and the platform has the additional benefit of creating a potential acquisition pipeline. 

Technology Takes Off

Public Storage invested significantly in technology ahead of the 2020 pandemic, which helped launch the eRental online platform, new mobile app, digital property access systems, and remote property management capability. Public Storage has developed the industry’s first end-to-end digital customer experience, which it offers across the entire portfolio. The company was in the final testing of eRental in March 2020. Six weeks later, it was deployed to its entire then 2,600-facility platform. The contactless environment was essential to improve customer health and safety during the pandemic.

Russell says Public Storage’s customers can complete their lease online in less than 6 minutes compared to about 45 minutes in the traditional meet-with-the-manager, self-storage model. Today, more than half of its customers use the eRental platform. By using the company’s digital channels,
customers can also pay their bill, manage their account, and access their units on their smartphone.

Additionally, Public Storage uses data to better understand customers and maximize revenue growth. By tapping into the data, it can obtain tenant information from rentals, reservations, income, occupancy, mobile use, and location interest. The company leverages that information to predict customer behavior and boost reservations.

“With 1.8 million customers, our data opportunity is massive,” Russell notes.

The REIT’s distinctive logo and orange doors are found across the U.S.
The REIT’s distinctive logo and orange doors are found across the U.S. Photo courtesy of Public Storage.

Looking Ahead

“Like always, the macro-environment can shift and present different challenges and opportunities,” Russell points out. “However, we’re very confident that we’re well-positioned, if in fact, we’re going into some kind of economic recession.”

From an inflationary standpoint, Russell notes that Public Storage is a month-to-month lease business, which is an “unusual and compelling opportunity.”

“Self-storage has historically been seen as a defensive sector,” notes Goldsmith. “It’s able to reprice regularly given all the leases are month to month, and they’re able to pass along inflation better than many sectors.”

Russell also points to continuing strong consumer demand and moderate levels of new, competitive product.  “We’re well-positioned not only to weather anything that could come our way but continue to allocate capital and find good opportunities,” he adds.

Industry observers expect a continued, solid performance. “Public Storage has a very defensive balance sheet, which positions the company well, given some dislocation in the credit markets, and in the event of a potential recession, if we’re not already in one,” Sanabria notes. Additionally, he says they’re able to leverage their scale to drive down costs, given their strong purchasing power.

Russell praises the company’s founders for their persistence and foresight and lauds employees who strive to provide an outstanding customer experience.

“We all have a lot of passion for the business, the company, the history, the brand. We bleed orange,” Russell says. “It’s a great business, and the company is in great shape. We’re really excited about our next 50 years.” 

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REIT Portfolio Managers Assess Key Trends and Issues for 2023

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REIT Portfolio Managers Assess Key Trends and Issues for 2023 Kyle Gustafson Nov. 17 2022

Sarah Borchersen-Keto

Portrait of Sarah Borchersen-Keto

Sarah Borchersen-Keto is Nareit’s editorial director and writes extensively for Nareit’s website and award-winning magazine, REIT: Real Estate Investment Today, and Nareit's website.

REIT magazine recently spoke with five portfolio managers to discover their strategies for navigating 2023 and the opportunities and challenges they see ahead.

Taking Stock

REIT magazine recently spoke with five portfolio managers to discover their strategies for navigating 2023 and the opportunities and challenges they see ahead.

Magazine head shots

After REITs strong operating performance in 2022, fueled by post-pandemic reopening tailwinds, the pace of growth is expected to slow in 2023. While macro conditions are expected to remain challenging, including the possibility of a recession, fundamentals are still expected to remain sound for the REIT industry.

REIT magazine recently spoke with five portfolio managers to discover their strategies for navigating 2023 and the opportunities and challenges they see ahead.

This year has seen volatility across the markets.  How do you see macro fundamentals shaping up for REITs in 2023?

Arthur Hurley: The REIT market continues to experience share price volatility from higher interest rates, higher inflation, and recession fears. Inflation continues to remain a big concern and the focus for investors remains on whether the Federal Reserve can navigate a soft landing.

If the Fed is successful, REITs should be able to continue generating attractive earnings growth on a relative basis. In this scenario, real estate would benefit from a steady demand for space with new supply growth limited by the recent increased cost of materials and labor. While the level of uncertainty and volatility remains very high in the investment marketplace, we believe there is still strong rental pricing power in many property types and that the fundamentals of the space have held up well.

As we continue to monitor inflation along with the likelihood of additional rate increases, the threat of a potential recession also remains a key theme as we look ahead to 2023. If the U.S. economy slows significantly, we still believe the property types best positioned will be the ones benefiting from secular tailwinds that will support attractive relative earnings growth. Meanwhile, management teams need to be able to operate in an environment of higher inflation and higher rates. This entails a heavy focus on cost controls and balance sheet management.

Brian Jones: For 2023, we expect the interplay between persistent inflation, slowing economic growth, and a likely hawkish stance by the Fed to remain a key consideration for real estate investors.

We view economic trends as broadly solid in the U.S. heading into 2023. Employment trends are holding up, nominal income growth is solid, and consumer and corporate balance sheets are well positioned. While this is constructive for growth and real estate operating fundamentals in 2023, it does suggest the Fed has more work to do to moderate inflation trends.

As for the possibility of a recession in 2023, one fueled by lower demand, corporate cuts, and increased unemployment could lead to lower tenant demand for space. REITs are better prepared this time around with stronger balance sheets, lower new construction activity, and diverse demand drivers that lean more defensive.

Lisa Kaufman: All eyes are on the Fed and global central banks as they try to tame inflation. The key question is no longer “if” but “how much” these actions will weaken the economy. We anticipate a recession in the U.S. sometime next year. On the positive side, we expect the Fed to be successful and scenarios of inflation spiraling ever higher are unlikely in our view.

Financial conditions have already tightened dramatically in 2022 and that has caused the downdraft we have experienced year-to-date in the REIT market. We believe the current higher rate environment will endure for the foreseeable future. That said, our outlook for REIT returns in 2023 remains constructive because of the material move in real rates and the re-pricing that has already occurred in the REIT market this year.

Rick Romano: The macro environment may remain challenging in 2023, creating continued volatility for REITs. However, 2023 should eventually bring answers to some threshold macro questions weighing on investors’ minds—what level base interest rates settle at, whether we have a soft landing, recession, or stagflation, and the outlook for inflation’s new normal.

Without those answers, investors are assigning a high risk premium.  As we get those answers in 2023, we expect risk assets (including REITs) to rally as some level of certainty returns to the capital markets and the macro environment.

Jason Yablon: Our base case is that we are entering what can be deemed an average recession—shallow and moderate in length—and that inflation may have already peaked at very high levels. While growth is slowing and the odds of a recession have increased, the job market remains healthy, but we do expect it to weaken. Consumers are generally in good shape, although their savings cushion is diminishing.

We believe fundamentals generally remain sound, but slower growth and higher inflation cloud the outlook for real estate, particularly for sectors lacking pricing power. Volatility is likely to remain elevated as markets discern whether we’re in for a hard or soft landing. One big question is how high financing will go and what that means for returns and real estate asset values.

What trends are you seeing in public versus private real estate investing?

Jones: Broadly speaking, real estate transaction volumes have slowed as buyers and sellers digest the implications of higher interest rates and a potentially slowing economic environment. Both public and private real estate owners seem to be allocating incremental capital to many of the non-traditional real estate sectors including data centers, cell towers, self-storage, and single family rentals.

REITs have typically utilized less debt and more fixed rate debt, which may put them in a better position to continue deploying capital.

Romano: We are seeing a nearly unprecedented historical disconnect between public and private real estate. Public markets are discounting and maybe over-reacting to what is going on with Fed tightening, inflation, and the tight debt markets for real estate.  We would expect convergence in pricing over the next 12 months, with REITs rallying and private real estate taking some mark downs. Right now there is very little transaction activity on the private side so there is little pricing transparency.

Hurley: Visibility regarding valuations in the private real estate markets has become challenging. Transactions have slowed and there is now a definitive spread between buyer and seller price expectations. Sellers still want yesterday’s pricing and buyers are hesitant to commit to a price with so much uncertainty and with borrowing costs above initial yields in many cases.

In the more liquid public markets, price reactions move much more quickly. Investors in the public markets are attempting to price in the negative effects of rising rates and the potential of a recession. As a result, we’ve seen implied cap rates move up significantly and earnings multiples move down to levels not seen in many years.

Yablon:  Across both listed and private real estate, values are being repriced as investors come to grips with a new cost of capital in the form of rising rates and the prospect of economic retrenchment.

While listed real estate is down, it will take time for this price discovery to be fully reflected in private real estate markets. Against the backdrop of our base case of an average recession, we expect private real estate values to sell off as much as 15%.

Differences in the real-time pricing of listed REITs and private real estate can create significant short-term dislocations. By understanding the leading and lagging behaviors of private and listed markets, investors may be able to tactically allocate at different times across the two asset classes.

Kaufman: Historically, significant discounts to NAV, like those on offer today, have been a strong signal for REIT outperformance relative to not only private real estate but to broader equities. Although uncertainty abounds, one thing is very clear-any investor allocating new capital to real estate today should look to the public market first before considering the private market. Investors who aren’t playing in both public and private real estate are missing a real opportunity to enhance not only their opportunity set but their risk-adjusted returns.

Which property sectors are you most optimistic about heading into 2023?

Romano: We are focusing on property types that have defensive, needs-based demand characteristics, are generating revenue growth above inflation, that have limited inflation exposure on the expense side, and that trade at large discounts to NAV. Some areas that fit this box would be apartments and specialty living property types.

We see opportunities in healthcare REITs, in particular those focused on senior housing.  We’re still seeing tailwinds to demand from the re-opening plus demographic trends and defensive demand characteristics that should create robust relative revenue growth in 2023.

Kaufman: We continue to like the set-up for the residential sectors, especially single family homes. We expect sector-leading growth from single family homes over the next several years as the upward pressure on rents from inflation meets the secular tailwinds from under-supply of affordable housing and an increasing population of renters maturing out of urban multi-family units.

Jones: Self-storage has benefited from households decluttering to arrange viable work from home environments. While this demand driver may have peaked, it has introduced an incremental long term customer that should support higher occupancies and positive rental rate trends.

The single family rental sector is positioned to capture demand from the millennial generation that’s beginning to form families. With home prices near recent highs and rising interest rates affecting affordability, the relative attractiveness of the single family rental offering has become more compelling for consumers. Within net lease sector we believe the durability of long term leases is attractive in an environment of economic uncertainty. Additionally, higher rates may lead to less acquisition competition from some of the more highly levered private investors.

Yablon: Sectors with pricing power will fare best in the current macro environment. We see growth potential in: self-storage; senior housing; single family rental; data centers; healthcare; alternative housing; and industrial.

Sectors with shorter lease durations can reset rents promptly as conditions change. Sectors such as cold storage or senior housing may also benefit from moderating labor strength, while cold storage could benefit from improved supply chains, and senior housing is seeing occupancies improving following early-pandemic declines. We see the residential sector benefiting from insufficient supply and home affordability issues.

Hurley: We still prefer companies benefiting from secular tailwinds. Industrial, self-storage, and assisted living facilities are still benefitting from secular growth drivers and limited threats from new supply. Residential rental properties continue to see strong demand and rising rents as demographics, migration trends, and strong employment levels still support this growth. Both multifamily and single family for-rent operators have recently reported occupancies that remain near record highs and releasing spreads in the low double digits.

Conversely, which property sectors give you pause?

Yablon: While we believe secular headwinds remain for retail, certain retail landlords with high-quality properties and strong balance sheets stand to gain market share over time. However, we are mindful of the impact of elevated inflation on the U.S. consumer and how this affects their buying habits.

We remain cautious toward offices as businesses reassess their future needs and estimate that rents will decline. We feel more confidently about offices in the Sunbelt region that saw the most impact from the great migration during Covid.

Jones: We remained concerned that some of the secular changes to how businesses and their employees interact initiated during the pandemic may have long lasting impacts. Hybrid work environments may limit demand amongst office tenants. On the hotel side, while leisure travel has recovered above pre-pandemic levels, business travel trends have not and the potential for a Zoom call to displace the marginal business trip may have lasting impacts.

Kaufman: Fundamentally, we are bearish on office given the ongoing impact on demand from the hybrid work environment and the seemingly never-ending capex burden on landlords to meet evolving corporate preferences and regulatory requirements for sustainability from municipalities. The market seems to have generally caught up to this narrative, leading to valuations that range from fair to slightly expensive.

On the other side of the coin is a sector we love fundamentally—cell towers—but where we find valuations too demanding.

What sort of landscape for REIT mergers, acquisitions, and dispositions should we expect?

Hurley: With access to capital more challenging and deal financing more difficult, it’s no surprise M&A deal volume has recently slowed. Pricing has become more attractive in the public markets relative to private. And private equity firms are still sitting on record levels of cash to invest. For those reasons, we expect private equity investors to be sharpening their pencils and in turn, more go-private transactions to be announced. Additionally, the recent sell-off could motivate smaller REITs with weaker balance sheets to look at combining with higher quality companies in the same sub-sectors.

Yablon: Rising borrowing costs have narrowed the pool of asset buyers, therefore, dealmaking may slow though institutional demand for real estate in a higher-inflationary environment should remain competitive.

Listed real estate has led private real estate in reflecting valuations of a more challenging economic environment. Private equity capital earmarked for real estate has reached over $300 billion globally. To the extent that listed valuations appear more compelling than private, we may expect private equity to target listed-company assets, in part or in whole.

Private real estate portfolios seeking to diversify away from core property types may see the listed real estate markets as an effective means to do that.

Romano: We expect a robust landscape for REIT M&A if private and public real estate pricing remains widely disconnected. We have seen a number of deals in 2022; however, given where the debt markets are today and availability of debt capital, we would expect any near term deals to be focused on public to public consolidation or privatizations from well-capitalized private equity firms.

The strength and appreciation of the U.S. dollar versus every other global currency has created a tremendous cross border consolidation and acquisition opportunity for well capitalized public and private U.S. dollar denominated real estate companies.

Kaufman: Today’s higher cost of capital, lack of price discovery for private real estate and growing macro-uncertainty has slowed transaction activity for private equity and REITs alike in 2022.

REITs have repriced while private real estate has not. As private real estate rerates lower, we could see activity accelerate again from both sides of the spectrum.  A lot of private capital has been raised and is on the sidelines. Eventually this capital will be put to work.

If history is a guide, REIT prices may begin to rebound even as private real estate values correct, allowing REITs to have a cost of capital advantage and perhaps a better opportunity for external growth than we have seen in the recent past.

Jones: So far, 2022 has been an active M&A environment, with a number of REIT to REIT transactions as well as privatizations. The volatility of REIT share prices presents an opportunity for more transactions as more REITs’ share prices move to discounts to their intrinsic value.

On the flip side, higher interest rates do increase the hurdle rates for levered REIT M&A transactions. The acquisition opportunity for REITs is interesting, asset pricing has softened and bidding tents are smaller for many sectors, which should enable REITs to maintain this avenue of external growth. However, the cost of equity and debt capital has risen for REITs, suggesting higher required return hurdles for most external growth opportunities.   

Do you see the focus on ESG issues shifting as you look ahead?

Romano: We would expect ESG to continue to accelerate as an area of focus for most investors; however, there is also a group of investors that believes it should be out of the scope of their investment guidelines. It will be up to investment managers to work closely with their clients to ensure that investment guidelines capture their clients’ needs when it comes to ESG considerations.

Hurley: ESG will continue to grow in importance in real estate investing. As more clients look to reduce their carbon footprints, the demand for structures with LEED certification will grow. We believe responsible investing is a key to generating long term shareholder value in real estate, especially since REITs are the landlords as well as the employers in the communities where they own properties.

REIT management teams will be expected to use quantitative measures for targeting environmental impact goals and setting specific dates for reaching these goals. Some teams have already started to do this, and we expect that many more will follow. From a social aspect, identifying actionable goals and executing on initiatives will be key to remaining competitive. While REITs have historically scored relatively well as a group on governance measures, the level of scrutiny here continues to be elevated and they will need to remain diligent.

Jones: Focus and engagement seems most pronounced around climate change and CO2 emissions reduction targets. Carbon neutrality and net zero target dates are certainly areas of focus amongst investors and REIT management teams.

The office sector is probably furthest along relative to tenants considering the environmental profile of their space and expressing a clear preference for green buildings. REITs have made significant progress around diversity on their boards and are beginning to make progress around the composition of senior management.

Yablon: While we will continue to place importance on governance issues, climate change and human capital management will likely receive heightened attention.

Carbon transition and physical climate impacts will be key facets of climate change risks and opportunities, with topics such as embodied carbon, Scope 3, net zero, and physical risk exposure and resilience likely to be growing areas of focus. Topics related to human capital management such as tenant satisfaction, employee engagement, and diversity and inclusion, will likely receive continued attention.

Investors will place an emphasis on consistent and comparable reporting, outcomes, and consideration of financial implications as they meet increasing client, regulatory, and other stakeholder demands.

Kaufman: Encouragingly, the level and quality of REIT disclosure on environmental policies, procedures, and performance has improved markedly over the last few years, making it easier for managers to evaluate and engage with management teams on the topic. Good ESG disclosure has now become tables stakes across the asset class.

Going forward, environmental initiatives will be increasingly mandated and measured by local and federal governments and demands on time and capital expenditure budgets will grow. REITs are leaders in this arena and are relatively well positioned to face and fund the challenge.

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REITs Focus on Supplier Diversity

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REITs Focus on Supplier Diversity Kyle Gustafson Nov. 15 2022

REITs embrace new practices, tools to improve supplier diversity.

Agents for Change

REITs embrace new practices, tools to improve supplier diversity.

Stock image of supply chain


REITs are exploring and implementing strategies, processes, and tools that can both move the lever on increasing their supplier diversity and have a meaningful impact on the communities they serve.

Supplier diversity has become a bigger focus in light of growing attention to social and economic inequalities. Other factors fueling that momentum include an increased focus on ESG matters, pressure from stakeholders, and the need to improve business resilience and drive better outcomes in the wake of supply chain disruption.

According to Nareit’s 2022 REIT Industry ESG Report, 55% of REITs surveyed have a supplier or vendor policy that addresses diversity, equity, and inclusion (DEI).

“As we look more at driving equitable outcomes, being inclusive, and disrupting the way we have traditionally done business, we’ve seen a number of REITs, and real estate companies in general, are recognizing the business advantages of using diverse suppliers and Nareit is thrilled to expedite this shift,” says Ayris T. Scales, senior vice president of social responsibility & global initiatives at Nareit.

Host Hotels & Resorts, Inc. (Nasdaq: HST) is one REIT that is tackling supplier diversity as part of its broader focus on social initiatives around diversity, equity, inclusion and belonging (DEIB).

“We also recognize there is additional opportunity to expand our influence and impact in DEIB by increasing the business we direct toward diverse suppliers, consultants, and contractors,” says Helen Jorgensen, vice president of design and procurement at Host.

Diverse suppliers, consultants, and contractors build business resilience by helping to drive innovation and diversify procurement, design, and construction strategies, which have been especially important as post-pandemic supply and labor challenges continue, she adds.

That initial surge of interest is now shifting to focus on the practicalities of how to engage with minority suppliers, manage relationships, and quantify the impact.

“Organizations have evolved from ‘we have to do something’ to ‘we have to do things that create results,’” says Ade Solaru, founder & CEO of SupplierGATEWAY. Those results are generally in the form of creating jobs and economic impact. So, the focus on supplier diversity is evolving towards specifically making changes in procurement that can truly benefit communities where companies are doing business, he says.

REITs Evolve Best Practices

REITs are at different stages in advancing supplier diversity strategies, and a common challenge is simply figuring out where to start.

“We’ve really seen an awakening of corporations, who have traditionally not even thought about the engagement of minority businesses in the supply chain, that have started supplier diversity programs,” says Pauline Gebon, vice president, member success at the National Minority Supplier Diversity Council (NMSDC).

The NMSDC has seen its membership surge 40% over the past two and a half years to some 1,500+ corporate members and a network of 15,000+ certified minority business enterprises (MBEs), Gebon says.

REITs are also developing their own game plans. For example, Ventas, Inc. (NYSE: VTR) is employing different strategies for different parts of its business. The company has developed a survey for its top professional services and financial firms. In an effort to further develop baseline data, Ventas gathers and monitors all available minority/women-owned business enterprises (M/WBE) and workforce data on its construction projects. The REIT also engaged an outside provider to track and identify opportunities to increase its M/WBE vendor spend.

Each of Ventas’ asset class verticals has developed a specific target to increase M/WBE vendor spend in 2022, and the REIT is also working to increase its network of M/WBE suppliers. “We believe that supplier diversity improves the communities in which we do business, by supporting job creation, fostering entrepreneurship, and building sustainable M/WBEs,” says Tim Sanders, senior investment officer at Ventas. “We have also experienced first-hand that partnering with a diverse slate of businesses, contractors, and providers brings a diversity of perspectives to our projects that drives innovation and success.”

As part of that effort, Ventas is participating in a joint initiative with Nareit, The Real Estate Roundtable, and others  to increase opportunities for M/WBE organizations across the real estate industry, as well as leveraging other resources, such as the National Association of Minority Contractors.

Another goal is to track M/WBE spending for all current and future development projects, as well as tracking other large corporate expenses. “After collecting this 2022 baseline data, we will be able to identify growth opportunities for 2023 and beyond,” adds Brian Frost, director of construction and development at Ventas.

Gathering Baseline Data

For Host Hotels, a key starting point has been its Supplier Excellence Survey. The REIT first launched the survey in 2019 with the intent to deepen engagement with its furniture, fixtures & equipment (FF&E) suppliers. The original survey included one question regarding diversity.

Host has since added targeted questions on diversity for its strategic suppliers and professional consultants who support engineering services, design and construction, and project management.

That Supplier Excellence Survey helps to gather baseline data, which has been used to develop a procurement program to support businesses with minority ownership, as well as women, veterans, people with disabilities, and the LGBTQ+ community. Host also uses an in-house platform to track spend with those diverse suppliers and consultants identified in the survey. Through that process, Host has learned that it is important to engage with suppliers early, communicate clear expectations, and provide an opportunity for collaboration and feedback, Jorgensen notes.

“While we have been engaging suppliers on sustainability and quality management for years, this is our first formal survey tracking spend with diverse suppliers,” Jorgensen says. “These initial insights are helping us identify opportunities to expand and deepen our engagement, as well as improve our processes and IT infrastructure to better track spend and formalize initiatives and corporate objectives.”

Although Host was encouraged by its initial results, the company also sees room for improvement in its approach and overall spend with diverse suppliers, she adds. In addition, the REIT plans to continue surveying its strategic suppliers, consultants, and contractors on an annual basis.

“Host is just beginning its journey in supplier diversity, and we’re excited to see how we can drive innovation and social impact through diverse supplier spend,” Jorgensen says.

We’ve seen a number of REITs, and real estate companies in general, recognizing the business advantages of using diverse suppliers and Nareit is thrilled to expedite this shift.

Ayris T. Scales, senior vice president of social responsibility & global initiatives, Nareit

More Than Checking the Box

Improving supplier diversity can deliver significant benefits beyond simply checking the box and increasing ESG scores. “When the practice of supplier diversity first began, it was on the premise that it was the right thing to do or the need to fill a quota. It’s no longer that. It’s a business imperative,” Gebon says.

There is a virtuous circle where spending money with diverse suppliers from diverse communities creates a positive economic impact with benefits that include higher tax revenue and greater spending power that has the potential to improve the bottom line for corporations, she adds.

Beyond economic impact, companies also are looking at supplier diversity in the broader context of creating a more resilient, reliable supply chain—a lesson that was brought home during the pandemic.

“The minute you realize you don’t have good alternative sources for products or services, and you have fragility in supplier relationships, suppliers can impact your success,” says SupplierGATEWAY’s Solaru. People recognized that they needed to invest in a supplier infrastructure that is robust and resilient and diverse, not only in DEI terms, but in terms that they can’t rely on just one or two companies and hope that they are always going to be there, he notes.

There is clearly a growing commitment within the REIT industry to increase its supplier diversity. In many cases, that is an extension of broader DEI initiatives. The industry is thinking about ways that it can increase diversity at all levels of an organization from its boardroom and employees to the vendors, suppliers, and contractors that companies are working with in a variety of aspects.

“At Ventas, we know that if we want to see the change, we have to be an agent for change. DEI is part of our core value system, and a key component of that is supplier diversity,” Sanders says. “We will continue to drive change internally and externally by increasing our spend with M/WBEs throughout the company, standing-up M/WBEs through mentorship, and working with industry partners to ensure that we are sustainably growing the M/WBE ecosystem across the country.”

New Resource Improves Access

In response to the growing interest in supply chain diversity, Nareit is actively involved in creating a new resource for its members and the broader real estate industry.

Through a collective partnership known as CREDS (Commercial Real Estate Diverse Suppliers Consortium), Nareit is teaming up with five other real estate industry associations—The Real Estate Roundtable, the Innovating Commerce Serving Communities, the Mortgage Bankers Association, NAIOP, and the National Multifamily Housing Council—in a collaboration with SupplierGATEWAY. The CREDS platform is expected to officially launch at the start of 2023, although Nareit members can sign up before then.

SupplierGATEWAY is a cloud-based supplier management solution that has been connecting buyers and suppliers to create more resilient supply chains since 1997. Currently, its database includes more than 5.5 million businesses that are owned by ethnic minorities, woman, veterans, LGBQT+, and people with disabilities. Its list of clients also includes some of the world’s most recognized brands, municipalities, and hospital systems ranging from Amazon and Target to Major League Baseball.

“We know there are so many small businesses that are minority- and woman- owned who are out there, capable, ready, and excited to be able to support our industry,” says Ayris T. Scales, senior vice president of social responsibility & global initiatives at Nareit.

The SupplierGATEWAY partnership will help bridge the gap in identifying those companies. The industry is making this commitment to saying that we want to engage more with these businesses, and this collective group of associations is helping to provide the tools to help make those businesses more readily accessible, she adds.

Anyone can do a Google search and come up with dozens of supplier options for a particular product or service, says Ade Solaru, founder & CEO of SupplierGATEWAY. The SupplierGATEWAY platform, however, allows for procurement from a singular place. Its searchable database provides information on qualifications, experience, references, and certifications. The platform also verifies information, such as confirming a company’s status as a minority or woman-owned enterprise.

Another advantage of the SupplierGATEWAY platform is that it functions as both a procurement tool and a supplier management tool, tracking things such as whether insurance and certifications are current. REITs also can use the dashboard to track who they’re hiring; total spend, along with the type of jobs and where spend is going to better quantify the economic impact. “All of those nuances that companies want to do today, our software helps them to do,” Solaru says.

Phase two of the SupplierGATEWAY partnership aims to provide ongoing technical assistance and capacity building for registered business that fall within the suite of services that the REIT industry is focused on, Scales says. “We want to make sure that if we’re giving woman and minority-owned companies this opportunity, that they have the capacity to perform and execute at the level that we are expecting,” she adds.

Organizations have evolved from ‘we have to do something’ to ‘we have to do things that create results’.

Ade Solaru, founder & CEO, SupplierGATEWAY

Steps for Success

Several years ago, the National Minority Supplier Diversity Council authored the eight best practices of supplier diversity, and those best practices remain relevant today, says Pauline Gebon, vice president, member success.

  1. Broadly speaking, the eight components that help guide supplier diversity strategies are:
  2. Establish corporate policy and top corporate management support
  3. Establish comprehensive internal and external communications
  4. Identify opportunities for minorities in strategic sourcing and supply chain management
  5. Establish a comprehensive minority supplier development process
  6. Establish tracking, reporting and goal setting mechanisms
  7. Establish a continuous improvement plan
  8. Establish a second tier program
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