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Market For REIT IPOs Still Historically Slow, But Experts Foresee A Rebound

The volume of REITs going public is seen as an indicator of the overall commercial real estate market's health, and it has been historically bad since the start of 2022 with zero new initial public offerings. But experts believe that could soon change. 

These publicly traded vehicles, many of which are incorporated in Maryland, still hold substantial value for investors, industry veterans argue. They said that value should entice companies to make public offerings in 2023, depending on factors like how doggedly the Federal Reserve increases interest rates in its bid to curb inflation.

"REITS are [still] the most elegant way to own, operate and capitalize commercial real estate," said Jonathan Morris, a former REIT executive who is now an adjunct professor at Georgetown University.  


The last 12 months have not been kind to the 225 publicly traded REITs in the U.S. The FTSE NAREIT All-REIT index, which tracks the performance of all U.S. REITs, is down more than 22% from the same time last year. By comparison, the S&P 500 is down 11% from last March. 

Despite the sector's overall struggles, a panel of investment bankers recently expressed cautious optimism to industry group Nareit about REIT public offerings rebounding this year. Bankers based their optimism on the industry's strong balance sheets and low debt, which places them in a position to deploy capital.  

"I would expect debt market issuance to improve in the first half of the year, while equity issuance will likely be back-end loaded. But when the markets open up, I would expect strong volume, driven by pent-up demand," Seth Weintrob, managing director and global head of real estate at Morgan Stanley, told Nareit. 

The number of REITs issuing IPOs is a decent barometer of the sector's health. That's because REITs usually proceed with IPOs to enhance their liquidity and finance operations, according to Nareit. That is crucial because those trusts must pay out 90% of taxable income in dividends to investors.

During the past 30 years, public offerings from REITs broadly followed a pattern of steep increases, dramatic drop-offs and strong returns every few years. According to an analysis from Hoya Capital Real Estate, compiled with data from Nareit REITWatch and Renaissance Capital, those ups and downs typically coincided with economic slumps and recoveries.  

The popularity of REITs going public reached its zenith between 1993 and 1994 after it emerged as a popular alternative funding mechanism following the commercial real estate collapse of the late 1980s and early 1990s.  

However, the pace of REITs going public over the last decade has remained relatively low but steady, with a median of five IPOs annually since 2013, according to Hoya Capital's analysis. Then 2022 hit, and for the first time in roughly two decades, not a single REIT completed an IPO. 

Venable LLP's Patricia "Patsy" McGowan said she doesn't expect another year of no REITs completing IPOs.

Patricia "Patsy" McGowan, chairwoman of Venable LLP's Baltimore Corporate Group, attributed the absence of IPOs to economic volatility. That uncertainty in the market, she said, caused REITs to reconsider whether they want to go public.

"Part of what will keep a company out of the markets, even if they feel they're ready, is just uncertainty. Nobody wants to go to the market when they don't know how the markets will go," McGowan said. 

Maryland has benefited from an especially high concentration of REITs, as it became the first state to pass legislation enabling the REIT structure in the 1960s and it still has favorable laws for the investment vehicles, McGowan said. She estimated that 80% of REITs are incorporated in Maryland. 

While not all of those incorporated in Maryland have located their corporate headquarters office in the state, many large REITs have done so, including Federal Realty Investment Trust, Host Hotels & Resorts and Corporate Office Properties Trust

"The initial REITs were forming here," McGowan said. "REITs became a little bit unpopular after that. And then they really resurfaced in the '80s and '90s and ever since. But we had that historical basis. And we also have a legislature that's recognized the importance of balancing investor needs and the needs of REITs under the tax law."

While there has yet to be a glut of clients rushing into her office seeking guidance ahead of planned IPOs, McGowan said, she anticipates more firms taking that step this year. She expects investor interest in REITs to rise due to potential backers aiming to diversify portfolios amid Wall Street’s volatility. 

"If you look at the public REITs, they have very strong balance sheets, they're very well run, and they're not just an asset where they own big buildings. They own energy pipelines and cell towers," she said. "These are not things that are subject to the whims of the consumer, or inflation and other things. So they just give you a little bit of protection from some of the other things you might have in your portfolio."

Yet Morris, who also founded the private education platform REIT Academy, warned investors about scrutinizing the trust market too broadly. He said any publicly traded trust analysis requires a sector-by-sector review. 

Office REITs, for example, have been hammered by disruptions caused by the coronavirus pandemic. As a result of rising vacancy in that sector, office REITs produced a negative total return of nearly 38% last year, according to FTSE

"The office market, in and of itself, I'd put it aside and not use as a measure of the REIT market," Morris said.

Morris said that most modern REITs focus on specific asset types, specializing in sectors like data centers, medical buildings and even cell towers. Those REIT types are most likely to resume public offerings and have performed well despite headwinds. 

One example, Morris said, is data center-focused Equinix Inc. Five years ago, its stock traded at nearly $420 per share. At the end of trading Thursday, Equinix stock was selling at more than $702 per share.   

"If you stay with a sector that will always have demand, you can buy REIT stock, especially when it's low, and it will triple (eventually)," Morris said.