Top Risks for REITs in 2014

By Stuart Eisenberg, Partner & RE Practice Leader, BDO USA, L.L.P.

The REIT landscape is constantly shifting, with new and evolving risks impacting the industry. The BDO RiskFactor Report for REITs is a yearly study that analyzes the risk factors cited by the 100 largest publicly traded REITs in the U.S. in their most recent 10-K filings. The study, which is now in its third year, examines the most commonly noted risks and ranks them by order of frequency cited.

In this year’s study, 94 percent of REITs say competition for lessees and prime real estate is a top risk, ranking it the third most frequently cited risk for a second consecutive year. With healthier market activity, more businesses may be able have a need to expand into new or larger office spaces, creating a greater pool of potential lessees over which REITs’ property owners may compete. The multi-family sector, on the other hand, may see more prospective tenants looking to rent if people remain cautious about job security, stray from home ownership or prefer to live in more urban environments.

Across the board, this intense focus on competition may be driving REITs to make capital improvements to retain and attract tenants, as well as may explain why 82 percent of REITs cite operational expenses and renovation costs as a key concern this year, up from 77 percent last year.

Many REITs are also paying close attention the financial condition of their tenants, a steadily growing risk. This year, 79 percent of REITs cite this as a risk, up from 75 percent last year and 71 percent in 2012’s study. This is likely linked to difficulty of attracting financially stable tenants. Going hand-in-hand with this concern is the threat of property foreclosure and bankruptcy, which 73 percent of REITs say is a risk, up from 65 percent last year.

Finally, while the general consensus agrees that the real estate industry has made a solid post-recession recovery, 74 percent of REITs still cite declines or stagnation in business and real estate values as a serious concern, up from 64 percent in 2012. As REITs continue to adjust to the new landscape, it is evident that some trepidation remains.

BDO’s report finds that amidst an improving real estate market, the REIT industry continues to face many risks. Consolidation within the industry and the difficulty of securing attractive lessees and tenants are propelling many of this year’s top concerns. You can access the full report here: https://www.bdo.com/download/3270