Despite strong property fundamentals, the challenging capital markets environment continues to weigh on REITs. This risk was cited by 96 percent of REITs studied. However, that percentage did show a slight improvement over 2015 when it was viewed as a risk by 99 percent of REITs. Although REITs tend to be a little more conservative on leverage, access to capital remains a concern as a large portion of the REIT market is continuing to trade at a discount to net asset value (NAV). After record issuance in 2015, when U.S. equity REITs issued $75.6 billion in common and preferred equity, unsecured bonds and term loans, overall capital issuance through March 21 is down by 18.6 percent compared to the same period a year ago, according to Fitch Ratings. In addition, REITs are concerned about the disruption in the CMBS market over the past nine to 10 months. 

This risk was cited by 96 percent of REITs, which is up a slight 92 percent compared to 2015 results and a leap from 75 percent just two years ago. That spike is likely due to the wall of maturities that are now hitting the real estate market from 10-year loans that were done in 2006 and 2007. Some REITs do have exposure to maturing property loans that were made at the peak of the market in the last cycle. This concern also ties into similar fears related to REITs’ ability to access capital.

REITs are concerned that financial covenants related to loans or lines of credit could hamper their operations or their ability to sell assets and make distributions to stockholders. One of the most onerous is the leverage covenant, which limits the amount of debt a REIT can incur compared to the value of their assets. This risk was cited by 96 percent of public REITs, which is relatively flat compared to 95 percent a year ago. However, it remains well above 2013 and 2012 levels of 76 and 79 percent respectively.

High-profile incidents ranging from extreme weather and terrorism to cyber security risk has REITs keenly focused on potential losses from such incidents at 96 percent. REITs worry not only that their operations will suffer, but also that they may not have adequate insurance and could face potential uninsured losses. Cyber security breaches, for example, can damage a company’s reputation, which is difficult to insure against.

Severe weather events, as well as high-profile terrorism events in Brussels and Paris in the past year, could be contributing to REITs’ growing concerns around business interruption risks. Business interruption risks are highlighted by 97 percent of REITs this year, up from 92 percent last year and 85 percent in 2014.

Interest rates are always high on the watch list for REITs, and with a ranking of 98 percent, the results of the 2016 research are no exception. The expectation is that interest rates will start creeping higher and REITs need to be prepared for that eventuality. Rising interest rates will add to capital costs, and higher interest rates could also have an impact on property valuations as the spread between interest rates and cap rates could compress further.

More REITs view this as a bigger concern at 98 percent, which is up from 93 percent a year ago. That increase is a nod to the more challenging regulatory environment overall in everything from lending to building codes. In addition, there is new legislation going into effect that will impact the broader commercial real estate industry, including the new FASB lease accounting standards, as well as new rules governing foreign investment into the U.S. under changes to the Foreign Investment in Real Property Tax Act (FIRPTA).

Concerns related to environmental liability have moved higher from 92 percent last year to 99 percent in 2016. That potential risk is likely more prominent due to greater focus on green building and sustainability, especially as those factors tie in to corporate social responsibility. Tenants are pushing more towards wanting to locate in green buildings, and there are now investors who look to “green” companies as part of their investment criteria. Added to that, there are more watchdog groups keeping an eye out for companies that are harming the environment and broadcasting those misdeeds to the authorities and across social media.

At 100 percent, all REITs agree these factors represent one of three top concerns in 2016. Competition for tenants and building sites is par for the course for real estate owners and operators. In addition, there has been an uptick in M&A activity that has pushed industry consolidation to the forefront. For example, the merger between Starwood Waypoint Residential Trust and Colony American Homes closed at the start of this year. This trend could continue as prices stay soft and companies look to achieve scale benefits. In May, New York REIT Inc. and JBG Cos. announced their merger agreement, which is expected to result in a new $8.4 billion entity operating as JBG Realty Trust.

At 100 percent, all REITs agree that this is another major issue facing the industry this year. REITs are keeping a close eye on the turmoil in global markets, and the potential impact that may have on the Federal Reserve’s decision to raise interest rates this year. However, a new report from Fitch Ratings predicts that steady employment growth and disciplined bank construction lending should keep demand ahead of supply for most property types, allowing for modest occupancy gains and low-to-mid single-digit rent growth.

Qualifying as a REIT is always front and center, and all 100 of the REITs researched for the BDO report agree this risk remains paramount in 2016. As REITs take more opportunistic positions, they have to address whether or not that fits under the REIT model, or if it might threaten their REIT requalification. In addition, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which was signed into law in December, contains a number of provisions likely to have a significant impact on REITs. While some of these changes will be favorable for REITs, all will add to the complexity of maintaining REIT status and satisfying the various compliance and reporting obligations.