Commercial property

For REITs, the NOI recovery is moving in the right direction

Stephen Boyd, Director of US REITs, Fitch Ratings

With the summer season approaching, more and more people are eager to travel, shop and return to in-person establishments. As the country continues its slow recovery from the COVID pandemic, the latest signs point to a promising stabilization in REIT real estate NOI.

In fact, Fitch found that the NOI rebounded an average of 6.1% in 2021. This follows its sharp decline during the height of the pandemic, when the NOI fell an average of 5.4%. Although the overall rates are encouraging, each real estate sector has varied considerably in its rate of recovery, with some faring better than others.

Across all sectors, hotel performance has been very robust, with an average NOI growth of 47.8% over the past year. However, this growth does not compensate for the sharp 56% drop that hotels suffered in 2020. With closures forcing very few people to stay in hotels during the pandemic, the sector has suffered a blow that has proven difficult to recover immediately. .

Another top performing sector in 2021 was self-storage, likely driven by the mobility of many people throughout the pandemic. NOI growth for self-storage averaged 18.5%, following a slight positive growth of 1.9% in 2020. This also reflects the sweeping changes in housing and state-to-state migration that have occurred during the pandemic. The Southwest, Rockies and New England regions each saw the strongest growth, with all regions exceeding 24%.

With more and more people returning to in-person establishments, the retail NOI also grew at a steady rate of 4.9%. Compared to the 5.5% decline in 2020, this brings the average retail NOI back to near pre-pandemic levels. Improvements in 2021 reflect the reopening of properties and the resumption of rental payments by tenants following the mandatory closures and lockdowns of properties in 2020. However, shopping centers still seem to be lagging behind – out of the retail sector , shopping centers saw the weakest year-over-year growth at just 2.4 percent.

Office Recovery Delays

Office NOI growth has proven to be the slowest to recover, with an average decline of 1.1% in 2021. Although both have taken a hit, urban properties have held up less well than the suburbs, down 2.8% and 0.7%, respectively. The lagged decline in office performance was expected as the lease structure supported them at the height of the pandemic. However, as new leases are renewed, it is likely that there will be further weakness in the sector.

Additionally, in many major cities, return-to-office rates are still low as work-from-home policies continue to evolve. The Great Lakes, Plains and Southwest regions saw the largest RNE declines, while the Far West showed growth and the Southeast and Middle East saw nominal declines.

Despite some discrepancies between sectors, the general direction of the RNE recovery is very encouraging. The next question will be how the 2022 NOI rates compare to the 2021 numbers.

Stephen Boyd, CFA, is a Principal in the Corporates group of Fitch Ratings.