The Non-Listed REIT industry is much different today than it was before the market crash. It is significantly less certain and offers much more opportunity. The uncertainties and opportunities become clearer if they are put in historical context.

Before the market crash the industry was dominated by the Big Four sponsors. The vast majority of the capital was raised by less than a handful of the largest independent broker dealers. There was little regulatory focus on the industry and life was good … or was it?

Below the surface, there was continuing characterization of Non-Listed REITs as Ponzi schemes stemming from the common practice of sending more capital back to investors in the form of distributions than was actually being earned. The fees and commissions were criticized as being too high to overcome and driving inappropriate sales practices. There was a nagging desire to characterize the investments as liquid. Although there was no consistency in the way performance was being reported, and little transparency around the methodology, there was a prevailing belief that the investments were somehow insulated from market risk.

As always happens, the market crash brought the real and perceived weaknesses to the surface. Ironically, the resulting challenges were not the result of poor asset performance. In many notable cases the assets were performing. It was a change in the accounting rules that caused unrealized losses to be taken as impairments. That caused lending covenants to be violated which then threw borrowers into default. Ultimately performance suffered. All of this led to a wave of negative press, increased regulatory scrutiny and the widespread realization that even Non-Listed REITs were not completely insulated from market risk.

Importantly, this created an opportunity for the industry to address some of its underlying weaknesses. Many participants in the industry welcomed the opportunity. Others are still clinging to the past. But the industry is evolving in many positive ways.

The market is dominated by new players. Many more independent broker dealers are raising significant amounts of capital. Already we are seeing programs cover their distributions with earnings. There is downward pressure on fees and commissions. The value of non-liquid assets is being recognized. Standardized performance guidelines are being developed. New product structures are being tested. Some of the sophistication found in the institutional markets is becoming standard in the industry. In short, Non-Listed REIT sponsors are doing the things that are necessary to make Non-Listed REITs more credible and therefore more widely accepted.

Martel Day
Principal
NLR Advisory Services, LLC