Equity REITs Trading at Discount to Historical Valuations
Equity REITs are currently trading at a price-to-AFFO multiple of 13.6x, considered undervalued amid market fears related to artificial intelligence. Historically, Equity REITs have outperformed the S&P 500, delivering an annualized return of 12.6% versus the S&P's 8.0% between 1972 and 2024.
- In the Chicago multifamily market, year-over-year rent growth is forecasted to be a robust 3.9% by the end of 2024, with all submarkets, including Downtown and the North Lakefront, expecting increases between 3.2% and 4.5%. Despite a 72% plunge in office sales, multifamily investment remains resilient, attracting $2.8 billion in 2023. - Midwest retail cap rates for all center types rose to 8.02% in the fourth quarter of 2024, indicating ongoing price adjustments in a high-interest rate environment. Meanwhile, the average cap rate for Chicago multifamily properties was 5.9% in the second quarter of 2024, with some deals closing at around 100-130 basis points above lending rates for quality assets. - To analyze REITs, investors look beyond standard earnings per share to metrics like Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO), which better reflect a REIT's cash-generating ability by adding back non-cash expenses like depreciation. A REIT's value can be assessed by comparing its current price-to-FFO (P/FFO) multiple to its historical average. - Institutional investors are increasingly using REITs for portfolio diversification and liquidity, with 39% of institutions now investing in them. A 25-year study by CEM Benchmarking found that REITs in defined benefit pension plans outperformed private real estate by just over 2% on average annually. - For those transitioning into real estate investment firms, employers prioritize skills in financial analysis (cash flow, ROI, cap rates), market research, negotiation, and financial modeling. Certifications like the CFA can be an attractive addition to a resume for top-tier private equity firms. - Key tax strategies for building a real estate portfolio include utilizing depreciation, which can be accelerated through cost segregation studies, and deferring capital gains taxes through 1031 exchanges by reinvesting the proceeds from a sale into a "like-kind" property. - Aspiring investors can raise capital through various methods beyond personal savings, including traditional bank loans, forming equity partnerships or joint ventures for specific deals, and real estate syndication, where a lead investor pools funds from multiple backers for a project. - To stay informed on the Chicago and Midwest markets, professionals follow publications like *Crain's Chicago Real Estate Daily*, *Midwest Real Estate News*, and *Bisnow Chicago* for industry news, market activity, and investment trends.
