US REIT same-store net operating income growth slows in 2023

Editor's note: In the below analysis, S&P Global Market Intelligence prefers to take cash-based same-store net operating income, if available. However, a noncash-based net operating income will be used if not.

US equity real estate investment trusts posted weaker gains in same-store net operating income for 2023, with median growth of 4.3%, compared to 6% for 2022.

The same trend was seen during the fourth quarter of 2023, as same-store net operating income (NOI) across the entire REIT industry slowed to a year-over-year median growth rate of 3.6%. This followed the stronger median gains of 4.5% in the third quarter, 4.3% in the second quarter and 5.1% in the first quarter.

Office, self-storage REITs incur losses

The office REIT sector booked the biggest year-over-year loss in same-store NOI during the fourth quarter, reporting a median decline of 0.6%. The sector still posted median growth of 1.4% for full year 2023.

Six out of 18 office landlords were on the overall list of US REITs with the largest same-store NOI losses during the fourth quarter. Office Properties Income Trust recorded an annual loss of 12.5%, the biggest decline in same-store NOI among office REITs and across the entire industry. For the full year, the office REIT reported a 7.4% loss in same-store NOI.

During the fourth quarter, Office Properties Income's same-store NOI was in line with the REIT's guidance range, which was a decline of 11% to 13%. "The decrease is mainly driven by elevated free rent concessions, vacancies and higher operating costs," CFO Brian Donley said on a Feb. 16 earnings call. The CFO also said the REIT expects further losses in same-store NOI of about 14% to 16% during the first quarter, in part because of higher free rent and tenant vacancies.

The five other office REITs on the list are Equity Commonwealth with a 12% drop in same-store NOI during the fourth quarter, Hudson Pacific Properties Inc. with 8.9%, Paramount Group Inc. with 8%, Franklin Street Properties Corp. with 4.5% and Kilroy Realty Corp. with 1.2%.

During the same quarter, the self-storage segment posted a median decline of 0.3% in same-store NOI. For full year 2023, the sector had a median gain of 3.5%.

Within the sector, National Storage Affiliates Trust had the largest drop in same-store NOI during the fourth quarter, at 1.6%. It logged a 1.6% same-store NOI gain for the entire year.

Two other self-storage REITs — Public Storage and Extra Space Storage Inc. — registered losses during the fourth quarter, at 0.5% and 0.1%, respectively, while CubeSmart recorded a fourth-quarter gain of 1.2%.

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Diversified Healthcare bags biggest gain

Healthcare REIT Diversified Healthcare Trust was the biggest gainer among all US REITs in the fourth quarter, reporting robust year-over-year growth in same-store NOI, at 26.8%. The REIT's performance for the entire year was even higher, with 39.2% in same-store NOI growth.

On a Feb. 27 earnings call, Diversified Healthcare CFO Matthew Brown said year-over-year growth in the REIT's office segment was driven by free rent burning off, while the growth in its senior housing operating portfolio segment was due to hikes in occupancy and average monthly rate.

Industrial, residential REITs show strong performance

The industrial sector logged the largest median gain in same-store NOI for the fourth quarter, at 7.4%. The sector's median growth slowed to 8.2% and 6.5% in the second and third quarters, respectively, from a 10.1% median gain in the first quarter.

Looking at 2023 as a whole, median same-store NOI growth for the sector remained high but slowed to 8% in 2023 from 8.9% in 2022.

The residential sector saw a similar trend over the last four quarters. Starting from a solid 9.4% median gain in the first quarter, the sector's growth slowed to 6.3% and 4.8% in the second and third quarters, respectively. The sector posted a slightly higher median gain of 5% during the fourth quarter. For 2023, residential REITs reported median same-store NOI growth of 6%, almost half of the sector's 12.7% median gain in 2022.

Same-store occupancy across all US REITs stood at a median of 94.1% in the fourth quarter, up from the prior quarter's 93.4%.

The median same-store occupancy rate across all REITs has been above 94% for most years since 2015, but the rate fell to 93.3% in 2020 amid the COVID-19 pandemic. The same-store occupancy rate bounced back to about 94.2% in 2021 and to 94% in 2022. In 2023, the same-store occupancy rate slipped again to 93.9%.