There Is Dislocation in Some REIT Sectors

After periods of upheaval, there is often a period of reshuffling.

David Bonser, co-head of Hogan Lovells’ corporate and finance practice in the Americas, has been focused on the REIT space since the early 1980s. He thinks there will be more merger-and-acquisition activity and market consolidation in the REIT space coming out of the pandemic.

“I’ve been in this space for almost 30 years now,” Bonser says. “You always think there’s going to be increased activity, and then it often never pans out. But I do think you’re going to see increased activity over the next 12 months.”

Bonser could see M&A activity grow in the retail space. He thinks some companies that were trying to turn around their sagging fortunes may decide it’s not worth the time or money. Then they’ll decide to sell and have another company handle the reclamation project.

“I do think you’re going to see a little bit more of a separation of the haves and have nots,” Bonser says. “That does tend to lead to price dislocation, which then leads to potential M&A opportunities. So I’ll be really surprised if we don’t see increased M&A activity over the next 12 months.”

While the hard-hit retail sector will see M&A, it won’t be the only sector suffering from dislocation.

“The office rates have improved, but I still wonder how much large companies are going to downsize,” Bonser says. “So it’s really hard for me to see growth in the office sector. To me, it’s going to be challenging. I do think you can make money there, but I think it’s a lot harder with virtually every one of your tenants trying to figure out how to do more with less space. It’s hard for me to see how that business grows. I think that is challenging.”

Even the relatively safe apartment industry has seen shifts during the pandemic. In the past, REITs were focused on high-barrier-to-entry cities on the coasts.But those urban portfolios could be falling out of favor.

“There was a flight in multifamily to either the coasts or downtown urban with high-rent amenities,” Bonser says. “There was an enormous flight toward that and it was hard to get attention if you were just some suburban multifamily REIT.”

But as everyone knows by now, people have moved out of the city during the pandemic. With many people working from home at least half of the time, they want a house, yard and more space.That could change which REITs are in favor. 

“In most cases, people are moving out to the suburbs, either for single-family residential or more of the garden-style apartments,” Bonser says. “The suburban multifamily product has really seen a resurgence because of this. Between the single-family residential stuff, as well as the multifamily in the suburbs, there’s going to be some real interest in the suburbs.”