In their more than six decades, real estate investment trusts have reached far beyond traditional deals and come up with innovative angles on such unlikely businesses as roulette tables and marijuana.
In the mid-2010s, Las Vegas casinos like MGM Resorts International sold their real estate to REITs while retaining operation of the casinos themselves. That allowed them to focus on gambling as the REITs enjoyed stable rental income.
About the same time, marijuana REITs like Innovative Industrial Properties began to offer investors steady yields from properties leased to state-licensed growers and dispensers of medical and recreational cannabis.
But more recently, innovation is taking a back seat to balance-sheet fundamentals. The past three years have been the toughest since the great financial crisis of 2008 for real estate investment trusts. With much of the property market at low tide, a number of publicly listed and privately held REITs are floundering. Many are straining to retain investors by raising dividends even as their earnings and valuations continue to shrink.
There is some optimism that the REIT industry and commercial real estate are recovering from high interest rates, heavy debt loads, and overexpansion, especially in office properties, that kept them out of the stock market boom. But those hopes are being whiplashed by fears of recession and rising costs linked to President Trump’s tariff and labor policies.
These challenges are leading to calls from the stronger REITs for a consolidation of the industry.
“There are just too many small REITs that have too little liquidity and not very good performance,” says Hamid Moghadam, chairman and CEO of Prologis, the largest publicly listed REIT by market capitalization and the leader in industrial warehouses.
This view is echoed by Shankh Mitra, CEO of Welltower, the dominant REIT in senior housing. It has been on a record buying spree of assets held by smaller, troubled rivals. “While the outlook for commercial real estate remains foggy, in some cases gloomy . . . it’s a clear and bright morning at Welltower,” Mitra told analysts in February.
Despite the setbacks of recent years, REITs continue to be viewed by other major players in the real estate industry as a powerful vehicle for growth. Blackstone, the world’s largest alternative-assets manager, has led private equity firms in acquiring stakes in REITs for a hefty portion of its property deals. Through its own nontraded REIT, called BREIT, Blackstone has also pioneered efforts to convince individual investors to turn over their capital for indefinite periods and accept limitations on liquidity.
REITs were expected to benefit from the so-called silver tsunami of retiring baby boomers seeking a steady source of dividend income. But those predictions continue to fall short as both pension funds and independent financial advisers show little enthusiasm for investing in REITs on behalf of their clients.
Spokespersons for several large pension funds say they consider REITs better suited for individual retirement accounts or 401(k) plans than for pension entities with hundreds of billions of dollars to invest. But for financial advisers, the drubbing that REIT valuations have suffered in the post-pandemic years makes them a difficult sell to clients nowadays.
“Nobody will return your phone call if you want to talk about a REIT,” says Lawrence Glazer, co-founder and managing partner of Boston-based Mayflower Advisors, which caters mostly to clients with less than $5 million in liquid assets. At this point, he tells clients who don’t hang up that REITs should be considered “a contrarian play.”
REITs were established by law in 1960 to democratize real estate investments by allowing Main Street investors access to income-producing opportunities that were previously available only to institutions and ultrawealthy individuals. By attracting a broader base of investment capital, REITs also encouraged the growth of commercial real estate development and operations.
Equally important, the legislation did not circumscribe real estate uses. So over the ensuing decades, REITs were able to attract capital for office buildings, residential projects, shopping centers, warehouses, health care–related facilities, and, more recently, data centers.
Today there are 196 publicly listed REITs — down from 220 a decade ago — with a total market capitalization of $1.5 trillion and investments in more than 20 different property sectors. They all adhere to the 65-year-old formula that requires them to distribute at least 90 percent of taxable earnings as dividends to shareholders. For this reason, REITs are meant to appeal to income-oriented investors, especially retirees.
REITs invest in real estate primarily to earn rental income and gains from property appreciation. Because they distribute most of this income, they typically retain only a small portion of earnings for reinvestment. This can limit their ability to expand through internal funding, so they must also rely on external financing methods such as issuing new shares or debt to fund further property acquisitions and developments.
For Prologis, the REIT structure provides far more advantages than constraints. Co-founded in 1983 by Moghadam, it began as an investment management firm that sponsored private equity funds in real estate. But the funds had eight- to ten-year terms, “and at the end we would have to liquidate them and start all over again,” Moghadam explains. So in 1988, Prologis opted to transform itself into an operating company as a publicly listed REIT.
Prologis achieved its massive size by narrowing its business. Three decades ago, it sold off its office buildings and shopping centers and focused solely on warehouses. It moved those warehouses as close as possible to major consumption centers rather than setting them near factories and ports.
The strategy paid off handsomely with the advent of e-commerce, which Moghadam recognized in the 1990s would be a transformative force. E-commerce requires three times more logistics real estate as traditional retail commerce, which warehouses within its stores. But those ever-larger Prologis buildings weren’t just about storage. They built multiple doors to get goods in and out quickly to fulfill the famed last-mile delivery of products ordered online.
M&A has played a major role in the REIT’s expansion. Between 2020 and 2023, Prologis spent more than $46 billion on just four large acquisitions.
It made some mistakes along the way. A joint venture to introduce cold-storage warehousing was a failure. And Moghadam still kicks himself for turning down an investment in Amazon when it was just shipping books in the 1990s. On the other hand, he points out, Prologis has become the largest provider of warehouse space to Amazon.
Today, Prologis owns 1.3 billion square feet — an area equivalent to all of San Francisco. Every year, it renews leases, at higher rents, on a fifth of this property, covering more acreage than Miami Beach. According to Moghadam, the main driver of his firm’s growth this year will be the raising of rents up for renewal by about 35 percent to match current market prices.
Prologis is also ramping up its investments in data centers, linked to skyrocketing artificial intelligence and cloud-computing demands. Moghadam insists this isn’t a departure from the firm’s narrow focus on warehouses. “We should be thought of as the leading provider of physical and digital infrastructure in the world,” he says.
Many Prologis warehouses can be adapted for use as data centers, using a team of experts already hired for these conversions.
The firm offers as a showcase its projects in northern Virginia, one of the leading data center locations in the world. But the biggest hurdle is the enormous electricity needs of data centers, which will require massive increases in both renewable and fossil fuel energy sources. And Prologis will have to get in line because Dominion Energy, the main power provider in northern Virginia, has a two-to-three-year backlog.
“You can own a piece of land and have a customer who wants a data center on it, but if you don’t have the power, you’re stuck,” notes Steve Sakwa, head of real estate research at Evercore ISI.
Health care–related REITs are supposed to address two major baby boomer concerns: the expansion of the facilities crucial for an aging population and a steady source of returns on those investments.
Welltower is one of the few health care REITs able to deliver on both promises while generating impressive profits for its shareholders. It is the largest owner of senior housing in the U.S., with some 103,000 units. Its business model — aimed at affluent, private payers — is unapologetically high-end.
In the years before Covid-19, when money was virtually interest-free, many publicly listed REITs and privately held real estate firms piled into senior housing and overbuilt the market. Then, in the wake of the pandemic, with interest rates shooting upward and debt mounting, many developers became desperate to sell off their assets.
They found a ready buyer in Welltower. With a strong balance sheet and a large scale, it enjoys access to both publicly listed REIT investors and cheaper debt in the unsecured markets. Last year, it spent $8.4 billion to acquire dozens of senior housing communities from other REITs and private real estate investors, in most cases paying less than it would cost to build them.
To locate acquisitions, Welltower uses a data analytics platform that focuses down to the neighborhood level, rather than the more usual state or city levels.
“We don’t target some regions over others, but rather the high-end neighborhoods, whether in St. Louis or Los Angeles or elsewhere,” says John Olympitis, Welltower’s head of corporate development. And most acquisitions are in neighborhoods where the company is already doing business.
This year, Welltower will be in a sweet spot, with rising demand for its senior housing from those who can afford to pay out of their own pockets as well as rent increases from those properties.
Senior housing for those who depend on insurance or social security to help cover costs will continue to lag. According to Green Street Advisors, a real estate analysis firm, about half of seniors fall into this category. And only about a third of the additional senior housing units needed to meet demand by 2030 will get built.
But is Welltower attractive to seniors looking for income? At first glance, its current dividend yield of 1.8 percent looks paltry compared with the many REITs offering 6 to 8 percent. But higher yields are often linked to declines in firms’ valuations and efforts to dissuade investors from selling shares. Some shaky REITs are actually borrowing money to pay higher dividends.
By contrast, Welltower has outperformed the broader REIT index by more than four times over the past five years. That’s reflected in its total returns — with part coming from dividends and part from capital appreciation.
Blackstone, the largest asset manager in real estate, has also led alts in the use of REITs. The strategy fits well with the firm’s capital-light model of not drawing on its balance sheet and instead investing third-party capital raised mainly from its private real estate funds.
Often those investments are used to privatize publicly listed companies, leveraging Blackstone’s scale and expertise to generate alpha. “We’ve done over 50 public company transactions in our history, and the vast majority of those privatizations have involved REITs,” says Nadeem Meghji, global co-head of real estate.
Other alternative-asset managers are also pursuing this strategy. One of the most successful was QTS Data Centers, a company originally structured as a publicly listed REIT. Blackstone identified QTS early on as a firm poised for rapid growth in the new era of artificial intelligence.
But as a REIT, it was required to distribute the vast majority of its earnings as shareholder dividends. And that made it impossible to raise the enormous capital needed to increase the power generation demanded by cloud-computing and AI operations. So in 2021, Blackstone took QTS private, for $10 billion.
Blackstone retained the management team and used QTS, backed by funds raised by Blackstone, as a platform for further expansion in the data center sector. Over the past four years, QTS has increased its installed capacity by a whopping 900 percent.
As alternative assets reached portfolio limits for institutional investors and the ultrawealthy, Blackstone became the leader in the use of REITs to court individuals with $1 million to $5 million in financial assets.
Blackstone’s main vehicle to attract them is BREIT. In fact, BREIT participated in the buyout of QTS along with funds that Blackstone raised from institutional investors and other limited partners.
BREIT is supposed to address a variety of problems posed by the mass affluent. Meetings with large institutional investors like pension and sovereign wealth fund managers are carried out face-to-face. But BREIT has to reach out to the many thousands of individual investors — and the financial advisers who serve as their gatekeepers — through webinars and other virtual gatherings.
BREIT was intended to resolve the issue of volatility that afflicts publicly traded REITs. Any change in investor sentiment — such as worries about interest rates, panicked reactions to an event like Covid-19, or tariffs — will lead to capital outflows.
As a nontraded entity, BREIT is designed for individual investors seeking exposure to income-generating real estate and willing to leave their investments in place as perpetual capital. As a safety valve, BREIT allows for monthly redemptions of up to 2 percent of net asset value and 5 percent quarterly.
From its inception in 2017 until 2022, BREIT grew to a net asset value of $68 billion — becoming by far the largest such retail investor vehicle in the private equity world. But in late 2022, it began facing significant redemption requests from investors. This led Blackstone to restrict withdrawals when demands exceeded the stipulated monthly and quarterly limits.
From February 2024, BREIT has fulfilled all redemption requests and has delivered a 9.5 percent annualized return since inception.
“BREIT’s semiliquid structure has worked as intended — offering investors the potential for higher net returns in exchange for a measure of liquidity,” Meghji insists.
But to help meet redemption requests, BREIT raised capital by selling more than $10 billion in assets, reducing its net asset value to $58 billion. Fortunately for BREIT and its mainly mass affluent investors, the QTS investment continues to be among its most lucrative.
Because of its dominant position among nontraded REITs, BREIT’s liquidity issues have affected the whole sector. “It’s been on pause the last couple of years,” concedes Stacy Chitty, co-founder of Blue Vault Partners, a research and consulting firm that focuses on nontraded REITs.
Alternative-asset managers have also reached out to ultrawealthy and mass affluent investors with publicly listed mortgage REITs. But these mREITs have recently suffered setbacks as well.
They were created to take advantage of the private credit boom by providing institutional and individual investors access to high-yield real estate credit through mortgages. But mREITs have become some of the weakest-performing REITs in terms of both dividends and market valuation. Since the pandemic, commercial properties, especially office buildings and shopping malls, have faced increased vacancy rates. With nonperforming debt on the rise, many REITs have opted to sell loans at a loss to clear risk from their balance sheets.
The valuations and dividend payments of even those mREITs linked to the strongest alternative-asset managers have tumbled.
Last year, Blackstone Mortgage Trust reduced its dividend by 24 percent, and Apollo Commercial Real Estate Finance cut its payouts by 29 percent. Worse still was Ares Commercial Real Estate, which dropped its dividend after first-quarter 2024 by a massive 55 percent. Its market valuation is down by 67 percent over the past three years.
REIT managers have attempted — with little success — to convince pension funds to increase their exposure to REITs. The Teacher Retirement System of Texas, a $200 billion pension fund representing more than two million public educators, illustrates this tepid view of REITs.
Real estate assets account for 14 percent — or $28 billion — of total TRS holdings, with all but 1 percent of this capital in privately held real estate. TRS has preferred to partner with investment firms for exposure to private real estate, targeting specific assets or portfolios. In recent years, it has also beefed up an in-house staff of real estate experts to carry out due diligence on deals and co-investing opportunities, thus saving hundreds of millions of dollars in fees.
But the pandemic, which made it difficult to sell most property, hit valuations for private real estate harder than for REITs. So TRS decided to capitalize on this divergence and tiptoe into the sector. In 2023, the pension fund invested $400 million in a passive, market-weighted index of U.S. REITs.
At the end of that year, TRS sold these assets, scoring a 17.1 percent internal rate of return and a $47 million profit. If TRS had invested the same amount in private real estate, using the Open End Diversified Core Equity benchmark that assesses the performance of private real estate investments in the U.S., it would have suffered a $35 million loss.
Still, the pension fund is not planning any major investment in publicly listed REITs and is waiting for the property market to rebound to increase its exposure through private real estate investments.
Historically, REITs have mirrored the broader stock market’s valuations. But the REIT index has been trading at recession-level valuations compared with the S&P 500, which itself hasn’t done well under the Trump administration’s unsettling economic policies.
Evan Serton, senior vice president at Cohen & Steers, an active REIT management firm, cites several factors as evidence for a possible turnaround. Interest rates have dropped somewhat, demand for several key property sectors is rising, and, with little new supply, some commercial real estate is again becoming profitable.
A possible broader rebound of the commercial real estate market later this year or next has rekindled the long-standing debate over passive versus active management.
Of all sectors of the stock market, real estate has the highest level of passive ownership. Predictably, most investors who believe a turnaround is on the horizon will choose exposure to REITs through passive indexes, such as real estate exchange-traded funds owned and managed by the likes of Vanguard, BlackRock, and Schwab. Their fees are cheap and risks are low — but so are dividends and total returns.
“A passive management approach means owning everything across all property types,” says Serton. “We have the ability to discern where the supply and demand are most attractive.”
That involves visiting REIT assets for different property types across the country to understand at a local level where supply and demand may be changing. And of course, that leads to higher management fees.
The stronger REITs have good reason to prefer an active management approach. Passive ownership lumps all REITs together, regardless of their differences in financial fundamentals. When passive investor funds flow in, all REIT stocks in a property sector go up; when funds flow out, all those stocks go down. And because REITs are largely treated as bond proxies, the whole sector is pulled up or down based on the movement of interest rates.
Whether passively or actively managed, the REIT industry has not been able to avoid sharp slowdowns every decade or so. In the present downturn, publicly traded REITs can be acquired at a substantial discount to their net asset value. That means it has actually become cheaper to buy real estate through a REIT than to purchase the properties directly.
Looking beyond the current bear market, it seems certain that the REIT industry will resume its innovative trajectory, expand into more property sectors, and increase its total market cap, though the number of REITs may continue to shrink.
Among the likely dropouts are those REITs that took on too much debt when commercial real estate roared ahead and got into trouble when the cycle spun downward.
“Ultimately, a lot of those companies are going to get consolidated,” Prologis chief executive Moghadam predicts.
