By Evan Hudson, partner, Alston & Bird LLP
Knowledge is power, and knowledge of trends enables you to stay ahead of your competitors. If you sponsor, sell or service public, non-listed real estate investment trust products, then you need to be aware of how they affect, and are affected by, the various megatrends that impact how people live, work, consume, retire, and invest their money.
How to gain that awareness? One way is by listening to someone who occupies a privileged seat, say, a securities attorney serving a broad swathe of the public non-listed REIT market, who has the good fortune of seeing everything, everywhere, all at once.
Here is what I am seeing. Take this information and use it to serve your clients.
Rise of Mass Affluent
There is a reason the major asset management houses want to target the mass affluent, also known as the lower end of the high-net-worth market: because that’s where they money is. We live in an affluent society, and no one is doing better than the top 10%. These people are largely anonymous. They are your successful friends and neighbors, the millionaires next door. They don’t own rocket-ship companies, control social media empires or manage trillions of dollars of other people’s money. They may have some education – be it formal or informal, professional, liberal arts, vocational or military. They work stable, reputable jobs, or own stable, reputable businesses. The market has rewarded them. They know to invest in stocks and bonds. But they also need alts. And if they want institutional real estate exposure, public non-listed REITs can be a good product for them.
Retailization is not new. For over 10 years, the largest and most sophisticated asset managers have reaped the rewards of serving the mass affluent. The rise of the mass affluent itself has even deeper roots, as high earners have pulled away from the rest of the income distribution since at least the 1970s, and this rise has accelerated after the 1990s, the 2008 financial crisis, and the more recent COVID-19 pandemic.
It ties into the general financialization of our economy, and the rise of democratized access to private real estate. I believe that public non-listed REITs as alternative products suitable for the mass affluent, will ride these tailwinds for a generation or more to come.
Megatrends in the Larger Economy
AI increasingly powers our economy, and believe it or not, public non-listed REITs are right there with it – specifically through data centers. Public non-listed REITs fund their development at a massive scale. When you ask ChatGPT to plan your meals for the week, the response might be emerging, as from an oracular cave, from a data center owned by a public non-listed REIT.
Public non-listed REITs are right there with demographic shifts as well, especially as they take form in the built environment: filling the need for senior housing, healthcare facilities, attainable housing, and student housing. E-commerce too: i.e., logistics and last-mile retail. As housing affordability challenges younger generations of Americans, public non-listed REITs offer single-family rental options. Lastly, as climate change drives insurance premiums upwards and increases the potency of natural disasters, real estate will increasingly be owned by well-capitalized institutional owners who can bear the risks and reap the rewards – with public non-listed REITs spearheading this trend as well.
Globalization of Real Estate Markets
As a public non-listed REITs attorney, I see vast amounts of inbound capital flow. Most every institutional public non-listed REIT sets up offshore feeder funds enabling non-U.S. money to flow into the portfolio. The money comes from almost everywhere – but a substantial amount from Asia – for diversification, a currency hedge, legal stability, familiarity, and prestige. On the outbound side, my public non-listed REIT clients and their competitors see opportunities in Canada and Europe and, to a lesser extent, in Asia.
Generational Wealth Transfer
As the baby boomer generation winds down, they want to sell appreciated properties and roll the proceeds into tax-efficient Delaware statutory trust programs sponsored by – you guessed it – public non-listed REITs. Accordingly, public non-listed REITs play a role in the largest generational wealth transfer in history, as DST investors get the benefit of 1031 exchanges, passive ownership, diversification, and further exit opportunities in the form of tax-efficient Section 721/UPREIT exchanges.
Regulatory Optimization
My last observation before putting the pen down involves regulatory optimization.
First, public non-listed REITs are moving toward private accredited structures. Traditional sub-accredited public offerings by public, non-listed REITs require state securities, or “blue sky” review – a pain at best and a show-stopping expense at worst. Increasingly, sponsors opt to skip the sub-accredited tier of investors and focus on retail accredited only. This means switching from a registered offering to a private Rule 506(b) offering, although the public non-listed REITs will inevitably seek such a wide investor base that it remains obligated to file reports under the Securities Exchange Act, hence remaining a public company.
This trend ties into the inflationary creep (downwards) of the accredited investor standard. In the 1980s, an accredited investor – annual income of at least $200,000 ($300,000 with a spouse) for the last two years or a net worth over $1 million, excluding primary residence – was considered a “rich guy”/“rich lady.” Now, not so much.
Second, public, non-listed REITs are participating in the wider trend toward private credit. Unsurprisingly, being a bank can be tough, but being a non-bank private lender has a lot of perks. Public non-listed REITs see the value in raising retail equity capital, borrowing under repurchase facilities and investing the proceeds into real estate-backed loans paying a handsome coupon.
In sum, what do I see from my rarified perch? I see public non-listed REITs serving the mass affluent, driving and participating in economic megatrends, globalizing capital flows, transferring capital from older to younger generations, and taking advantage of regulatory efficiency. Know these trends and prosper.
Evan Hudson, a partner at Alston & Bird LLP in New York, has been recognized for his impact within the real estate investment space, shaping the future of retail alternative investments through expertise and innovative solutions. He has led multi-billion-dollar capital raises through IPOs, public offerings and private placements, empowering sponsors to access high-net-worth and mass affluent investors. Hudson’s work spans a full range of retail alternative investments – from net asset value and lifecycle real estate investment trust to Regulation D offerings – all within the guardrails of the securities laws.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.
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