Scott Trench: 3 years ago, we had Jussi Askola, REIT expert from High Yield Landlord, talk about REITs. And we had a lively debate here on the BiggerPockets Money Podcast about real estate investment trusts versus rentals. Since then, both real estate investment trusts and rentals have been pretty flat, significantly underperforming the S&P 500 or other major market indexes. Jussi is back to talk with me about the landscape for REITs, what’s happened, his wins and losses, and where he thinks the opportunities are going forward. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. Without Mindy Jensen, I am Scott Trench, your real estate investment trustee solo host today. I am very excited to be joined today on the BiggerPockets Money Podcast by Jussi Askola for this conversation. Welcome back to the BiggerPockets Money Podcast, Jussi. How’s it going?
Jussi Askola: Very good. Thank you for having me, Scott. And as I was just telling you, the big change from last time we talked is your mustache. It’s very nice. I like it a lot.
Scott Trench: I’m very glad you noticed the mustache. So, or the mustache. Yes. Wonderful. So, well, to start things off, for people who haven’t listened, I want to actually pop a big question here, which is, we talked maybe about 2, 3 years ago about REITs. And if you just look at a broad REIT index, like VNQ, it hasn’t really gone anywhere, right? I mean, and that’s big news, because the rest of the market’s gone and ripped. Can you maybe start us off there and tell us what’s happened here? We thought there was a good case to be made, hey, REITs are probably at a relative low, they haven’t gone anywhere for a while, and they still haven’t gone anywhere. So what’s going on?
Jussi Askola: So it depends obviously on when you start your measurement period. But generally speaking, REITs have gone through a multi-year bear market. This bear market began in early 2022 with the surge in interest rates. This hasn’t fundamentally impacted REITs quite that much. The average loan-to-value in the REIT sector is only 35%. So despite interest expense rising somewhat, the impact hasn’t been significant, as REITs have also benefited from the high inflation in rents. And because of that, cash flows and dividends have kept on growing, even as REIT share prices dropped to lower levels. But since late 2023, REITs have actually begun their recovery from this bear market. The total return of REITs on average since late 2023 is about 55%. So it’s nothing exceptional, but they’ve been gradually recovering from this bear market. But you’re correct to point out that REITs have significantly underperformed the S&P 500 over the past 5 years or so. And this is unusual for REITs. Over the past 50-plus years, if you include this recent bear market, REITs have actually earned very comparable returns to the broader market over the long run. I’ve been posting a lot of content online about this opportunity. I think that with a lot of REITs trading at large discounts relative to the value of the real estate they own, they are today presenting a very compelling opportunity, in my opinion.
Scott Trench: Let’s start there. Why is this a compelling opportunity? And talk to me about pricing of these REITs. Are we pricing it on price to earnings, or in the REIT world, price to funds from operations, or adjusted funds from operations? How do you think about this? And can you define some of these terms?
Jussi Askola: Yeah, I mean, there’s many ways to measure REIT valuations. But basically, over the long run, historically, REITs have typically traded at a small premium to the net asset value on average during most times. And this makes sense when you think of it, because REITs essentially give you exposure to real estate, but with the additional benefits of liquidity, diversification, limited liability, professional management, economies of scale— all these things that have value. And so typically REITs would trade at a premium to the net asset value on average. However, today, following this bear market, we’ve reached share prices dropping quite significantly. Now you have a lot of REITs trading at 20%, 30%, up to 50% discounts relative to the value of the real estate net of debt. So that’s one way to measure the valuations of REITs, is that a REIT might own $1 billion worth of real estate net of debt, and yet its market cap might be just half of that. So that’s one way to measure the valuation. And that’s a reason also, by the way, why there’s been so many REIT buyouts lately. We’ve had, I think, 10-plus buyouts this year alone. This M&A activity has really accelerated this year, with major private equity firms like Blackstone, Brookfield, KKR, Blue Owl, and many others going after REITs, paying significant premiums, often 20%, 30%, to acquire the REITs, and they’re still getting a good deal. And so this is my favorite way of measuring the valuations of REITs, is to compare their net asset value to their current share price. That’s how I like to measure it. As you know, I’m thinking of REITs as real estate investments, and I’m always comparing in which I’m getting the best value. Do I get a better value for buying REITs or buying private real estate?
Scott Trench: You know, because of your conversation, I dabbled in REIT analysis for a little bit here. I didn’t put any real money into it, but I looked at REITs and I was like, I understand this net asset value argument, but in order for me to concoct a net asset value opinion, I have to understand every building in each REIT’s portfolio, and then mark it to market. And these things are not marked to market, right? There’s not a lot of liquidity in buying or selling office buildings in Dallas, Texas, in Class A right now. How do you value it? I mean, you can put a price to square foot, but you’re going to get a range that’s super high. So I think that’s the challenge here, is they’re trading at a discount to net asset value. Are they? I don’t know. I think that’s where it is. Certainly, KKR and Blackstone apparently think so, at least in some cases with these acquisitions. But walk us through how you would actually make the argument or defend the stance that these are trading at a discount to net asset value if the assets were marked to market fairly in many of these REITs.
Jussi Askola: It’s a lot of work to calculate these net asset values. The first thing to note here is that publicly listed REITs, which is what I focus on for the most part, are not typically releasing an estimate of the net asset value. They will, according to US GAAP, record the value of their assets on the balance sheet as historic cost minus the accumulated depreciation. So if you’re just looking at balance sheet figures, that’s not going to get you far. Those are not reflective at all of the true market value of the properties. Instead, you’ll have to calculate them yourself. And as you noted, it can be very tricky when a REIT owns, let’s say, 100-plus properties all over the place. Sometimes they are not really specialized, they own all kinds of properties. That makes it very difficult. But the good thing is that this doesn’t have to be an exact science. You will never manage to determine the exact net asset value to the exact number. But even if you have just a good estimate, you can often tell if a REIT is undervalued or not. You will not know if it’s undervalued by 17%, but you’ll know that perhaps the range might be 15% to 25% discount. It’s not an exact science. But there are a lot of REITs, especially the smaller ones that are very specialized— let’s take the example of BSR REIT, which is an apartment REIT that I like to talk about, that focuses on the Texas Triangle. It owns these garden-style Class A new-built apartment communities in cities like Dallas, Austin, and Houston.
Scott Trench: Real tough time to be owning apartment buildings in Dallas, Texas. Maybe a good time to be buying, I don’t know, but a tough time to be owning, right?
Jussi Askola: Oversupplied markets for sure that are going through a rough time. But my point here is that despite them owning a portfolio of a lot of assets, you can, with a reasonable amount of certainty, know a good cap rate range for this type of asset in these markets. And then you can apply that to the forward NOI of the company, and you can deduct the debt, and you’ll get to an estimate of the net asset value. Today the shares of the REIT are trading at an implied cap rate of about 6.5%. But in the private market, transactions are happening at closer to a 5.5% cap rate for this type of asset. And so you’ll know that there is likely some type of discount even without knowing exactly how much it is.
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Jussi Askola: There are a few important points to consider here. The first one is that while REITs make up a large portion of VNQ, this actually isn’t a pure-play REIT ETF. It’s a real estate ETF. And this means it also includes a lot of homebuilders. It includes real estate development companies, some brokers. And so it’s not fully a REIT ETF. And a lot of these businesses have had a particularly rough time, even rougher than REITs, following the Great Financial Crisis, following the pandemic. So it’s not a pure play on REITs. But even then, you’re correct, REITs had a very rough 20-year period. They’ve suffered several black swans in this time period, starting with the Great Financial Crisis. We had the surge in interest rates, we had the pandemic. So no, you’re correct, the last 20 years, especially if you include the last years and you start before the Great Financial Crisis crash, it’s been a very poor time period for REITs. What I would say here, though, is that if you expand this time period to 50-plus years, which is the longest existing time period for REITs— back then VNQ wasn’t even available— but if you look at the REIT indexes provided by NAREIT, which is the representative body of the REIT sector, their returns have been very competitive over the long run, even slightly outperforming the S&P 500 over the last 53-year period, I believe, ending in 2023. So before this, a lot of this value was lost in this recent bear market. But yes, valuations today are low, market sentiment is low, and that’s impacting the performance of REITs a lot, if you look even over the last 20 years.
Scott Trench: Why is that, though? Because, you know, I just take like a single-family rental, and you held that for the last 20 years, things are going well, right? I made a lot of money, even if I had some rocky roads, or even if I had the nightmare tenant— 2 years out of those 20 years and had to do the big hassle or whatever and was slow at it— I still doubled my money easily unlevered, right? Maybe tripled it unlevered. And then you add leverage and it just goes through the roof. If I put it in the S&P 500, I did very well. Why are the REITs in housing— let’s just segregate into that category alone— why is that not ripping?
Jussi Askola: As you mentioned here, there’s a lot of different categories of REITs. And I think that what’s hurting the averages, these benchmarks in the REIT sector a lot, is the fact that there are all kinds of REITs, and the dispersion of returns is really big. You might have an industrial REIT focusing on e-commerce warehouses that’s shareholder-friendly, that’s done extremely well over the long run, delivering 15%-plus annual returns over the past decades. East Group Properties is a good example of that. But then at the same time, you might have an overleveraged, poorly managed office REIT with significant conflicts of interest that might have gone bankrupt in the same time period or lost significant value. And so you take the average of the two, and yes, your returns are not great, but if you’re able to select that good REIT, you would have actually earned pretty good returns. There are studies that show this, actually, that the REIT sector is one of the very few today in which active management still beats passive even after fees. And that’s quite rare today. There’s a lot of studies that show that it’s nearly impossible these days for active managers to outperform the S&P 500 or a lot of the major market indexes. But in the REIT sector, it’s not the case. And I think it’s simply because there’s a lot of bad apples in the REIT sector— companies that are conflicted, that have poor management, overleveraged on troubled assets— that exist primarily to enrich their managers. If you’re able to weed those out already, the average performance of that chart will be a lot better. More specifically, going now into the residential space, which you mentioned, the last 3 years or so, the aftermath of the pandemic, a lot of these REITs have suffered a lot because of oversupply. We mentioned BSR. It performed really well during the pandemic, obviously. It was even trading at a premium to its net asset value still in early 2022, had delivered great returns. But then the market sentiment took a particularly big hit, because it wasn’t just rising interest rates, but it was also the oversupply leading to stagnating or even slightly declining rents. And so as a result, today you even have those blue-chip A-rated multifamily REITs, like Camden Property Trust or Mid-America Apartment Communities, trading at large discounts to the net asset value. It’s been one of the REIT sectors that has actually suffered the most in this bear market.
Scott Trench: This is really interesting, because that was my big question around VNQ. And thank you for the clarification that it’s not just REITs that are being housed in VNQ. But even if you did have a perfectly set up REIT index, the story would be similar— maybe a little different, but it would be similar— that it just hasn’t gone anywhere. And so your answer is active management actually— you have to then begin to go back to skilled management. Oh, I can hear a Boglehead screaming at their earbuds right now that active management doesn’t work. So can you explain this from the theoretical or philosophical standpoint, and then give us an example in practice of what that means?
Jussi Askola: Yeah, there are 200-plus REITs in the US, there are 1,000-plus worldwide today. And the basic concept is that if there are 200 REITs in the US, not all of them are worth buying, probably. And I think that you can start with the management. There are 2 management structures in the REIT sector. A REIT can be externally managed or internally managed. With the external management structure, the management is outsourced to an outside company that takes care of the management in exchange for fee income. And this management structure, over the long run, has proven to lead to much greater conflicts of interest, lower economies of scale. And as a result of this, all the internally managed REITs have outperformed very significantly the externally managed REITs over the long run. Even then, there are still a lot of externally managed REITs that exist today, and they are part of these ETFs. By simply avoiding these externally managed REITs— of course, there are some exceptions in the mix that likely are quite attractive and worth buying— but by simply avoiding these REITs, you could already do better on average. So you’re basically looking at fundamental factors that historically, and likely in the future, are likely to lead to better returns. And you’ll build a more concentrated portfolio.
Scott Trench: I want to chime in here, because I could hear everyone who’s a landlord who listens to BiggerPockets thinking, well, that makes perfect sense to me.
Jussi Askola: Right?
Scott Trench: Because I imagine that returns for a self-managing landlord in the single-family or duplex space over 20 or 30 years is very different from the returns from somebody who has outsourced third-party property management in many cases as well. That observation doesn’t take much for me to believe, even before I see the data, what you just said there.
Jussi Askola: Yeah, and the internally managed REITs, on the other hand, that’s a structure that has proven to do a much better job at aligning the interest but also leading to economies of scale, because what this means is that the management is hired as employees of the REIT, and their compensation will not be a fee structure with, let’s say, 1% of assets under management and then some incentive fees, which doesn’t scale. That means that the asset manager is simply keeping the economies of scale for themselves in the form of higher fees and higher margins. With the internal management structure, they are simply employees, with the compensation that’s typically tied to some key performance indicators that reflect shareholder value creation. So there’s much better alignment of interest and better economies of scale. And so naturally it leads to better returns. If you give the right incentives to people, you’ll have better outcomes.
Scott Trench: Thank you for saying this. And it’s just fascinating. I don’t know, I’ve never had somebody actually make this assertion on the podcast. I can’t defend what you’re saying, but I’m taking it at face value for now. But like at BiggerPockets, right, you had some stories, they exist, of people who bought a duplex, moved into it, literally lived in it and self-managed it and failed. That can happen. But the overwhelming sentiment from this type of investing is positive financial outcome over the long run, right? You can lose, but it’s relatively more difficult to lose because you’re able to just control everything there. You see the problems, you can react instantly, you’re on site. And then from there, I heard a lot of stories about people building out-of-state, long-distance rental property portfolios. I don’t know how those are turning out, but I’ve heard a lot of horror stories in that category. I’ve heard fewer horror stories from people who bought a bunch of properties in their area and self-managed them right on that scale. In the syndication space, the same story repeats, right? Dude in rural Cincinnati who buys the same vanilla type of apartment for 20 years seems to be doing just fine as far as I can tell. Dude who bought 30 different asset classes across 7 geographies in different types of locations and lived in yet another geography is not doing so good and things are going very poorly. This story repeats across all real estate as far as I can tell, as a rule, and not as a hard rule where it’s perfectly strict, but without too many deviations across the entire value chain. And so I have no trouble now coming back to, if I’m investing in BSR REIT, which you like, I’m going to assume BSR REIT, generally speaking, is concentrated in one or a small handful of geographies, generally speaking, has staff on site in those geographies, and generally speaking, employs that staff to actually manage the assets over the entire hold period. Is that the right way to infer what I’m grasping from the argument you’re making?
Jussi Askola: Going even beyond that, the management of BSR REIT will be internal, and they will have significant skin in the game themselves. They own a large chunk of the equity, which will then do a good job incentivizing them and trying to unlock this value. And a good example of that is last year they sold a third of their portfolio to another big REIT called AvalonBay just to try to prove to the market that, look, our assets are more valuable than what we’re getting credit for. They sold these assets at a roughly 5% cap rate, and they then used this cash to buy back a lot of shares at a big discount to create additional value for shareholders. And a conflicted management would typically do the opposite. It would want to grow the size of the pie to justify higher salaries and higher fees. They are doing the opposite. They are scaling down operations to try to unlock value. BSR is just one example, but I completely agree with what you’re saying here. And management is really the number one thing, whether you’re on the private side of the real estate market or the public side in the REIT sector. It’s always the first thing I start with, because at the end of the day, real estate is a fairly low margin, low barriers to entry industry. There’s a lot of bad actors in it. Let’s say you’re analyzing REITs. If you cannot be comfortable with the management being well aligned with you, the rest of the story really is irrelevant. They might own the best assets, have the strongest balance sheet, a very low valuation, but if the management is not well aligned, is conflicted, you’re still likely going to face poor returns over the long run. They’ll do a lot of stupid things like raise equity at dilutive prices just to grow the size of the portfolio to justify higher salaries. And so then you have a chart like you have with VNQ where it doesn’t go anywhere. And then the opposite, if you have a REIT like I mentioned earlier, EastGroup Properties, a very successful industrial REIT, has done exceptionally well over the long run. Their managers own a large stake of the REIT themselves. They think like real investors, and they’re constantly following a unique strategy of developing the real estate themselves, earning initial yields far superior than what they could get by buying stabilized properties in the private market. So yeah, management is the most important thing, in my opinion, whether you’re in private real estate or buying REITs.
Scott Trench: I come back to, you know, I’m a long-term investor and I’m debating where I want to allocate my capital. It’s BiggerPockets Money, so maybe I have a rental or 2 already, so I have real estate exposure in my financial portfolio in addition to my house. I’ve got, you know, some stock investments, maybe S&P 500 or market index funds. And why should I add REITs now if I can’t passively allocate to the REIT, based on what you’re saying here, because of the exposure here? And I’ve either got to form an opinion about the net asset value, either by constructing a forward estimate of funds from operations, unlevered, and then putting the debt back in, or by actually valuing each building separately and providing an opinion of value. And then I’ve also got to figure out if the fund manages their own assets, all or in part. And there’s no checkbox, as far as I can tell, next to the REIT that says we manage our own fund here. I’ve actually got to go in and read stuff or get an opinion from certain other parties. So this seems like a lot of work to invest in the REIT sector successfully.
Jussi Askola: For sure. It’s not an easy category to invest in, which is why I think, to this day, REITs remain a bit of this obscure sector that’s right in between stocks and real estate. And real estate investors don’t really trust the stock market often, whereas stock market investors don’t understand real estate. And it is definitely a trickier sector to invest in. But if you’re willing to do the work, I think that there are some very attractive opportunities. And we see these big private equity players that are very highly sophisticated. They are certainly doing the work and investing billions of capital right now in REITs, because they essentially allow you to buy real estate at a steep discount to its net asset value. And historically, whenever they’ve traded at such large discounts, eventually they have recovered and richly rewarded investors. There was Janus Henderson, which is a big investment firm, that came out with an investment study. This is already a few years back, but this study showed that historically, when REITs have traded at a 28% discount to NAV or more, they have on average, in the following 3 years, nearly doubled your money. And obviously this is historical and it’s an average, doesn’t mean that this is going to happen over the coming years. I think the discount to NAV is actually a bit smaller today on average as well. But the point is that historically, when you’ve gotten to buy REITs at a big discount, you’ve gotten to earn pretty good returns over the coming years. But yes, it is work to select those REITs, and you may not participate in those returns if you just buy something like VNQ, or perhaps your returns will at least get partially diluted by some of these REITs that are poorly managed or on troubled assets, like some office buildings that are facing oversupply, or some overleveraged REITs that are really feeling the pain of rising interest expense. So yeah, it is just like private real estate, it’s time-consuming. You have to study your market. You need to meet brokers, you need to inspect properties. Similarly, REITs can be quite time-consuming as well.
Scott Trench: Awesome. So let me transition to attractive sectors here. And I’d like to start and then hear your opinion here. But I have 3 theses that I’m interested in exploring. I have committed money to only one of these so far. The first, which I did place a small position in, is office real estate. My belief is that office is a really unique and interesting opportunity right now, where a good portion of the office buildings that are vacant right now will never really functionally return to being offices again, right? You have a large tenant who vacated, the building’s old, it’s useless, it’s gone. And that means that vacancy rates are overstated in many parts of the market sector, because they’re including these buildings that are just not really competitive anymore. And the second part of this is that a lot of leases still are going to mature in the next few years with tenants who have no reason to renew, or will renew with much less space. That is simultaneously overstating occupancy in the better stuff right now. So you have a really interesting analysis challenge, but it boils down to, in markets where people are moving and businesses are moving in the Class A sector, I think you have a really long tailwind for demand for return to office in that sector. And you may have very low pricing priced on today’s occupancy rates. I made a modified version of that here locally in Denver, in an office building that I thought had a chance to fill back up when it was positioned really well over the next 7 years of our hold. But when I was looking at this from a REITs perspective, there seems to be moderate opportunity. It doesn’t seem like it’s really fully priced in that this is a deep bear market in that specific expression of the thesis. And it seems like if it was, then you have to really go into a market that you may be less comfortable with, like Dallas, Texas. People seem to already be pricing this in, that this is going to happen back, but in Denver, perhaps they’re not really pricing that in, maybe rightfully so. But what’s your opinion on this in a nutshell? I’ve gone very fast here, but has this occurred to you? Have you thought through this thesis?
Jussi Askola: So generally speaking, yeah, I agree that clearly the gap is growing a lot between the Class A office building with great amenities that’s very well located versus this very generic office building. The gap is getting enormous. And so if you’re asking me if I’m generally bullish on office, including these generic office buildings, then I would say no. But these Class A buildings can be very attractive investments, probably over time. Most office REITs, they focus on these Class A, new build, modern, great amenities type of buildings, often in supply-constrained markets like New York City. And so, because of that, while their market sentiment has taken a hit, it’s not quite as much as many would expect, given this narrative going around that offices are not needed anymore, everybody can work remotely, and AI is going to lead to major white-collar labor force disruption, and so on. But no, I agree with you. I think that in many ways, the demise of these lower quality buildings is going to benefit these higher quality buildings, as tenants are moving out and they’re consolidating, perhaps leasing a bit less space, but they’re leasing that space in the higher quality buildings to motivate their employees to get back to the office. With that said, really one main thing that concerns me about office potentially is that I do wonder if some of this lower quality stock will change hands, get new owners sometime over the coming years, with new owners coming in with much lower basis, which will then allow them to heavily reinvest in these properties to try to make them somewhat more competitive with the higher quality buildings. And they will not ever be quite as high quality as these newer built, nice properties, but that could perhaps bring some new competition suddenly to the market with this, let’s say, Class B but improved, competing a bit more with Class A on the pricing. That’s one element that concerns me a bit, if we see a lot of these empty buildings see new owners coming in with lower basis over the coming years. Well, second thing is, how is AI going to impact the office sector? I think that in the near term, it may be a net negative, where companies are using some of those efficiencies to cut down their labor force. However, over the long term, I think that you can also make a very bullish case. I think that AI could potentially lead to an explosion in new small business formation, because it’s becoming easier than ever before to start almost any type of business. And if that’s the case, likely we’ll have a lot more competition, actually, for good office buildings over time. But yeah, I kind of myself put it in the too-difficult basket so far, the office sector, and decided to focus on other easier plays in the REIT market, given that the discounts you have, the valuations, are not that different between, let’s say, office and apartment communities or service-oriented retail, which is easier for me to see the bull case. But I certainly think that there is a compelling argument to be made for the long term to buy these good office buildings.
Scott Trench: I went and walked an office building maybe 6 months, 8 months, 9 months ago now, and I think the guy got this thing for like $7 million, 150,000 square foot office building right in the middle of downtown Denver. So they’re giving it away for free, right? I mean, that’s effectively, I got it for free, unlevered. I think they bought it unlevered. And so now it’s just like, I have some costs to operate this thing, but if it fills back up, I’m going to $70 million on the exit at a 10 cap, if I can ever get there, or I’m going to lose this and then some money and have to demolish the thing. And so that’s an interesting bet. That’s what I think is really fun about office right now for investors today, is that’s not my kid’s college fund here, but you can have potentially good odds on a series of those types of bets in the sector, depending on how you want to go about it. So that’s, I think, the case in a nutshell. And I think when you frame it like that, I think it’s too hard for most people. But if you have a sleeve of these kind of side bets, maybe there’s a case that there’s mathematical alpha in some place in there. So that’s one part. The second thesis I have is multifamily. I was late on multifamily. I put some money in in 2020 or 2021 into some syndications, and I write that down pretty heavily at this point. I count it as zero. Maybe I’ll get something out of that, I don’t know, in some apartment complexes. But, you know, by 2023, we were seeing, it was clear what was going to happen in that space over the next few years. I would’ve said 2023, 2024, and 2025 would be tough. But what I’m surprised at is that the timeline keeps extending. And I think what’s happened here is banks have been very generous, or not very generous, maybe scared, maybe some combination of fear and greed in the banks, and they’ve been extending a lot of the credit lines so that the forced selling did not begin en masse before 2026. We are now seeing some forced selling, forced liquidations in the space that is steadily ticking up. So 2027, 2028, who knows what that’s going to look like? But it seems like the time to express a thesis in multifamily is when you have large amounts of forced selling really heavy underway for a while. And we have not been there yet. That’s what surprised me, is that the observed market condition where, to me, it would be a really good time to put money, go pretty big there. And we just haven’t had that in the apartment space yet. So what’s your thought on that from a macro perspective? And then I’m sure that it varies regionally, of course, as you look at it.
Jussi Askola: Seems like just like you have grown more and more uncertain about the multifamily sector. Back in 2024, I remember everybody was saying that 2025 will be the year when finally same property NOI growth turns positive, and the oversupply gets absorbed in most markets, and we turn the corner, things get better. Then 2025 turned into 2026 will be the year.
Scott Trench: I’ll say this, I’m going to be straight wrong now in 2026, because I would have said rent growth was going to be really strong here in 2026, because of the deliveries. I’m going to be straight wrong on that one. It’s going to be down, and down substantially, in Denver in particular. I don’t know how I’m reasonably insulated with my duplexes so far. I certainly had a couple of vacancies, but man, like, that is— I’m just straight wrong. I would have expected that absorption to be well underway by this point, 2 or 3 years ago.
Jussi Askola: Same. And if it makes you feel better, I think it’s not just you and me who were wrong. If you listen to the REIT management teams in 2025, most of them were expecting rent growth already to accelerate in 2026, and it simply hasn’t happened. And now everybody’s talking about 2027. But as the year progresses, I feel like more and more people are again getting more concerned that actually it’s probably going to be maybe 2028. It’s been significant supply, and then just not enough demand growth. Don’t have much migration. There’s a lot of factors why just the market has remained surprisingly weak. And so that has caused me to slow down some of my purchases of multifamily real estate in favor of other property sectors. But even then, if let’s say cap rates for a given subsector of multifamily is, let’s say, 5%, 5.5%, but you can get something that’s representative of that in the REIT sector at 6.5%, as an example, an implied cap rate that is quite attractive, in my opinion, long term, with good management, not heavily leveraged, with an attractive strategy, with a REIT that’s selling assets and buying back shares to create value, take advantage of the spread. So, you know, it’s not theoretical, they’re actually taking bold steps to try to take advantage of this discount. I think that that can still be quite attractive from a risk-reward perspective, not necessarily as an investment that will generate huge returns like potentially these office buildings, but as a more conservative investment that AI will not be able to disrupt, will always be a roof over our head. So I like that aspect of multifamily.
Scott Trench: But I think when the robots start building homes, there’s nowhere to hide.
Jussi Askola: Yeah, potentially. But I think that if you go that far in the rabbit hole of AI, I think that then it’s important to start considering the value of real estate in real terms rather than nominal, because I think that if robots are literally building everything, I think that you’ll see the cost of most goods and services still drop a lot more than real estate. So in real terms, the value of real estate will still hold its own quite well.
Scott Trench: I feel the same way. Yeah, that’s how I’ve expressed it in the past. There is exactly what you just said. So if you’re betting on deflation, what’s going to deflate the least? Yes.
Jussi Askola: And so in real terms, real estate will still hold its value and its purchasing power measured by most other goods and services. And obviously you still have the land, you have the building permit, you have the bureaucracy, you need financing, you still need building materials. So yes, it may come down somewhat, but probably not as much as many other goods that can be produced at scale in some factories by robots, as an example.
Scott Trench: Here’s another question, actually, as a deep dive on that, because I understand the multifamily and residential real estate space much better than I do the office financing piece. I mean, it’s actually fairly simple in some of these commercial spaces. But in multifamily, you know, I see some real wacky financing stuff going on in single-family and multifamily, especially as the portfolios get complex. Literally to the point where I was pitched a syndication deal once, and here’s the premise. It was like a portfolio of single-family homes, and they’re being purchased at a 7 cap. Great. Then there was a really complex debt structure that involved some short-term components, some, you know, longer duration stuff, some balloons, all these different crazy things. And the return of this thing was like 11 or 12%. And I was like, if you assume 3.5% appreciation and a 7 cap, you get to a 10.5 cap. Now I know it’s like a little crude way to do it, but why are we doing all this for 100 basis points of return? On the financing piece, it’s kind of crazy when you just buy the thing paid off. This is what I’ve done—I bought some paid-off properties last year. It looks like rents went down right afterwards. That was not the thesis in there. But again, I’m still doing fine with it because it’s unlevered, right? I’m getting an okay return on the thing. Why is that not being expressed more in the REIT space right now? And why are they going to these crazy lengths with the financing? And how do I then underwrite—untangle the mess of financing that goes on?
Jussi Askola: Yeah, I mean, in the case of your syndication, I don’t know, but I would assume that if you didn’t have all this financing and you looked at the potential unlevered return after fees, probably it would have been quite a bit less than 10.5%. So maybe part of the difference is the fees that the syndicators were trying to take for themselves.
Scott Trench: Same with the REIT sector, right? So to a lesser degree.
Jussi Askola: You’re right. So in the REIT sector, you have some REITs that take so much debt, they are so greedy and create such complex capital structures that eventually it pushes them into bankruptcy. It’s quite rare in the REIT sector, but you’ll have a lot of REITs that turn into value traps where they’re too greedy, they try to maximize the size of the portfolio, and that comes with taking a lot of leverage and very complex structures. And in the end, this was supposed to allow you to earn better returns with the leverage, but actually, in the REIT sector, we’ve seen that the REITs with the lower leverage have delivered better returns than highly leveraged REITs over the long run. Because not only do they avoid the big crashes during downturns, but on top of that, they’re able to act aggressively and buy properties from distressed sellers when times are tough. And that creates a lot of value over the long run. Because of that, most REITs have now learned their lesson. And especially following the Great Financial Crisis, REITs have been gradually deleveraging. So the average loan-to-value in the REIT sector is today in the 30% to 40% range, which is quite conservative. Most private real estate investors commonly will use 50, 60, 70% loan-to-values or even more in some cases. So by those standards, REITs are actually quite conservative today, and most of them don’t have a very complex capital structure. But you’re right that there are quite a few that are, and one company that lost me quite a lot of money is called Aroundtown—it’s a German REIT-like entity. It’s not officially structured as a REIT, but it’s a REIT-like entity that owns a lot of office but also industrial real estate. And they closed a major deal just before the surge in interest rates—unlucky timing. Since then, they’ve been trying to sell assets to pay off debt. They failed to sell enough of them. So recently, they had to come to a restructuring agreement with their lenders. They came up with this really complex structure with different tranches of debt, very high interest rates. Some of the debt—the interest is not being paid. It’s simply being accumulated in kind, so the loan balance keeps on growing over time. Once again, we get back to management. Real estate is a people’s business in the end. And if you have a very good, skillful manager that’s shareholder-friendly, probably they will not make the mistake of being too greedy with leverage. They will think long-term over a full cycle and make sure they can survive a major black swan, because those black swans will occur. But then again, if you invest in a REIT or a syndication that’s managed by someone who’s greedy, just looking after their short-term financial interests in the form of fees, then these things will happen.
Scott Trench: So this one’s more speculative—I actually don’t know anything about this category, so I want to ask you. It seems like there’s a narrative out there that data centers have been really ripping and providing a huge disproportionate share of the positive return that we’ve seen in the last year. If we zoom in on that area in the REIT sector, can you tell us what’s going on in the data center sector?
Jussi Askola: Yeah. Data center REITs are doing quite well. They’ve benefited from this AI trade. The AI revolution is unquestionably leading to significant demand for this infrastructure, and it’s leading to growing rental rates and occupancy rates. But myself, I’m actually not very interested in these specific REITs. And to be fair, I’m not even super well informed about them—I don’t follow them that closely. That’s simply because I don’t really view them as traditional real estate investments. In my mind, the terminal value of these buildings remains very uncertain. Let me ask you this: do you think today’s data centers will be similar to the data centers 10 years or 20 years from now? Or do you think that perhaps investing trillions of dollars of capital in this space might lead to some major innovations, and that could potentially—maybe not render the property completely obsolete, but perhaps its value could be cut significantly if suddenly it’s simply not nearly as efficient as the data center of the future? Because I’m not a technology expert, I’m not able to answer the question of what the probability is of this happening. But I just feel like if you’re investing so much capital in this space, likely we’re going to keep seeing some innovations over time. And perhaps what we’re building today, and what’s valuable today, might not be in the future.
Scott Trench: I think that if I were to talk to an AI about REITs right now and attempt to have this conversation, I would have very few of the opinions and insights that you’re generating. I’d have more data, and much of it would be wrong, that I’d have to correct in there. And that’s being powered by an average AI data center of 100 megawatts. Jussi’s brain right here, and all of the intellectual horsepower he brought to this conversation, is being powered by 20 watts. That’s a ratio of 5 million to 1, right? So the data center is consuming 5 million more watts than your brain is. There’s no physical reason why the data center has to be that large in the end, in a terminal sense. Now, whether that’s 20 years from now and these things provide an excellent return for their investors because the cash flows grow exponentially over those 20 years—and then hundreds of years in the future, the AI chips that we begin to use are moved into a vehicle that can be contained in the same volume or mass as the human brain or smaller. But there’s no reason why these have to be there for that long, versus human habitation probably needs some minimum size that’s more durable. So we can get to the really big theory—that’s where you can arrive there. But I like your answer that these are really uncertain where they’re going to end up and how that’s going to go. And I think it’s a really good bet that you’re going to see more megawatt capacity being built in the next few years. And I think it’s a really open-ended question whether that’s going to be the case in 10, 20, or 30 years.
Jussi Askola: And obviously, you have the REITs, and not just the REITs, but the major private equity players like Blackstone, and Brookfield, and Blue Owl—they’re all making a very compelling argument that this is an amazing opportunity for investors, because you can develop a major data center and have an A-credit tenant. Some of the best credit companies in the world lease that space for 20 years with a strong lease, they take care of all the expenses, and you earn a pretty good return—a solid cap rate with rent escalators. But what’s the value of that property in 20 years? That’s the thing. If you think the terminal value is good, then it’s an amazing investment. But if you feel that’s a bit of a coin flip—you’re not a technology expert, like me—then that’s the reason that has kept me away from these investments so far.
Scott Trench: Kind of like the inverse of that office investment, right? Office is either going to zero or it’s going to a lot, and you can buy it really cheap. This one’s either going to a lot or going to zero eventually, and you can buy it fairly expensive, but it has cash flows that you can underwrite in the next few years. That’s the difference there. I think that’ll be interesting, and I find that a very challenging thesis as well, but it’s really fascinating for you to be able to go so quickly into a lot of these expressions. So those are the 3 big ones I wanted to cover here—office, multifamily, and data centers—at a high level. Where do you look? What are some of the places that you think are the most prime for opportunity right now in the REIT sector?
Jussi Askola: So I like service-oriented retail a lot right now. By that, I mean a strip center that’s anchored by a grocery store and some tenants that focus on essential services. Those are quite attractive in my opinion, because retail is undersupplied today. It was out of favor for so long that very little got built. Now occupancy rates are growing, rents are growing, and same-property NOI growth of most of these retail REITs is 3% to 5% annually. And yet, despite that, these REITs often don’t trade at valuations that are that different from multifamily REITs, as an example, which are facing stagnating rents or even slightly declining rents. So I think that’s an attractive opportunity—unfortunately, less so than it was one year ago. They’ve now risen already quite a bit in 2026. Our biggest investment in this space, called Whitestone REIT, got bought out by private equity players. That one worked out really well, but we still own some investments in this space, including Kite Realty Group, Kimco Realty, and some others. So retail is attractive in my opinion. Alternatively, while we talked about data centers earlier, many investors like to invest in data centers to profit from this AI revolution. I prefer to invest in cell tower REITs, because I think they will also benefit from the AI revolution over the long run, as I expect it to lead to an acceleration in data consumption. More and more of us have apps like ChatGPT on our phones—very data intensive. But on top of that, we’re going to have more and more of these autonomous vehicles everywhere. We’ll have a lot of smart city technologies using AI. We’ll have, at some point, perhaps humanoid robots. And all of that, I think, is very data intensive. It’s going to force the tenants of these towers to reinvest more heavily in the equipment. I expect this to, over time, lead to higher rental income for these REITs. So that’s, I think, a narrative that’s overlooked today by the REIT market, and I think that makes the cell tower REITs quite compelling, as they trade at historically low valuations. I think those will be the 2 that come to my mind.
Scott Trench: This has been fascinating. So it sounds like the takeaways I’ve got today are: you agree REITs, in a broad sense, have really gone nowhere for a long time—at least 10 years, maybe 20 years—small positive nominal price increase. There have been distributions, of course, but really it’s just been crushed by owning a single-family home as a rental, for example, or maybe just buying your family house rather than investing in REITs. You might have done better over the last 10, 12 years. Then it’s been crushed by the broader market. And if you’re going to invest in these REITs, there’s a thesis that you need to bring to bear on where you want to find the opportunity. That’s a very complicated, difficult process, and you could be very wrong at each part of it. And then if you’re going to invest in individual REITs, you’ve got to understand how to value the underlying assets. You’ve got to understand the growth thesis. And then you’ve got to understand if they check that box that says “I self-manage” or not, in your opinion, as one of the major factors in making that decision. Is that a good summary of the key takeaways from you today?
Jussi Askola: It is. The only thing that I would add is that I would argue it’s not that different, in the end, from private real estate. Probably if you looked at all real estate combined—probably all single-family homes in the US, in every market, including all the tertiary markets, the secondary markets, more rural places with declining populations—probably the returns have not been all that great over time. But if you’re more selective, if you first learn about how to invest in real estate, know how to look for a good deal, get educated, then obviously you can find some great investment opportunities. It’s a bit similar in the REIT sector. There’s no magic. You can buy an ETF that represents everything, and your returns might be decent if the REIT market is going through a good time and the market sentiment is strong. But especially if you go through a long bear market and many black swans, you’re going to do quite poorly. If you want to earn good returns, probably you need to be a bit more selective. Again, you need to spend some time educating yourself, doing some research. It can be a full-time job if you want to do it right. It’s not an easy way of investing. But if you do it right, it can be very rewarding. I gave you the example of EastGroup Properties in the past, but there are countless examples of REITs that have existed for decades and, including in this past time period where most REITs have done poorly, they’ve kept compounding very strong returns consistently over time. So the key is to be selective, just like in private real estate.
Scott Trench: Awesome. Well, Jussi, where can people find out more about you?
Jussi Askola: I have a Substack called High Yield Landlord. Alternatively, I wrote this book, which you mentioned earlier, called The REIT Advantage recently. Oh, it’s blurred so you cannot see it. But it basically discusses pros and cons of REITs versus private real estate, as well as my investment strategy. But those are the 2 places where people can find me.
Scott Trench: I would refer people also, in addition to your book, to the conversation we had previously here on BiggerPockets Money. You can just Google Jussi Askola, BiggerPockets Money. That’s J-U-S-S-I, A-S-K-O-L-A, Jussi Askola. We had a wonderful debate, I thought, about the pros and cons of privately held real estate—single families, duplexes, triplexes, and quadplexes—versus the REIT world. There are real pros and cons, and there are, I think, arguments for both. That was a really, really fun one. So go check that one out as well. And go check out The REIT Advantage by Jussi and High Yield Landlord. I have, at various points, been a subscriber to your excellent newsletter and series of analyses that are constantly rolling out on various REITs. Is that the right way to describe that?
Jussi Askola: That’s the right way to describe it. We share there my portfolio and how I’m investing in REITs, and so on. And likewise, I think I started following BiggerPockets—I don’t even know how long ago it was, but I was not even working yet, so it was a very long time ago. I’ve been following all the content on the blog as well as on YouTube, so I enjoy it a lot. While I’m bullish on REITs and I like REITs a lot, and in my mind it’s the better way of investing in real estate, I also invest in private real estate. I think there’s a place for both, as we’ve discussed in this earlier interview.
Scott Trench: Oh, you have private real estate now?
Jussi Askola: Well, the place I’m in right now, as an example, is private real estate, and I own it. These days it’s become my office, but initially it was my residence.
Scott Trench: The house hack or business hack—you know, the business hack is a less talked about one because it’s a different type of profile—but moving into the office building that you then rent out to other people, or using your converted house, whatever it is, those are the same concept, and I think it’s really hard to beat: I’m going to move into a property and then also turn portions of it into income or other productive use. That’s just a killer app that beats buying a duplex out of state, or the next market, or a REIT, or a syndication.
Jussi Askola: I think in many cases, for many people, no one is ever going to be a better tenant than yourself to your own property.
Scott Trench: And then no one’s ever going to be a better landlord as the renter of the property. When you want to move out and move into the bigger office down the block, do you think your landlord will let you out of the lease? Yep. Well, awesome. Well, Jussi, this is great. Let’s catch up again in 6 months or a year and see how things are going. Good luck with the REIT portfolio this next year.
Jussi Askola: Thank you very much again for having me. It was a pleasure. Talk soon. Bye-bye.
Scott Trench: All right. That was Jussi Askola. Scott, what’d you think? Great question. I thought it was a pretty interesting discussion. I think Jussi is really, really knowledgeable about all this stuff. I think it’s been a really tough market, so he’s clearly spent a lot of time studying. And I thought it was really fun to talk with someone who has, I think, studied the REIT landscape as intensely, maybe even more intensely than I’ve studied the small mom-and-pop or, you know, retail landlord that has 10 or fewer properties. So, I mean, the amount of hours I spent talking with people in that space probably comes reasonably close to rivaling what he’s put into the REIT sector. And it’s amazing how many parallels exist when you really dive deep across those two sectors in terms of what seems to work for the small mom-and-pop and what seems to work at scale for REITs. I think the most fascinating thing is self-management or close proximity to the properties—maybe not necessarily self-managing, but I think that’s going to be a major theme in real estate returns over a career: are you close to the property? And are you involved in the decision-making on any high-stakes, or, you know, maybe even the day-to-day operations of managing a portfolio? And I bet that has an enormous difference-maker impact on the long-term returns at every level of real estate investing across the entire spectrum. So that’s my biggest takeaway from today’s episode.
As a reminder, over at BiggerPocketsMoney.com, we have a whole host of developing resources. We’ve got, I think, 20 artifacts now in our resource library at BiggerPocketsMoney.com/resources. I’ve published four calculators. Those can be found at BiggerPocketsMoney.com, and you can go to the dropdown for resources, and you’ll see the, I guess, five calculators that we’ve released at this point across budget benchmarking, Monte Carlo, pay-down-the-mortgage-or-invest-in-real-estate calculator, income tax projection tool, and a healthcare cost estimator, and many more to come. So those are—I’m having a lot of fun building those, and go check them out, provide any feedback, and we’re constantly iterating and shipping new ones. So check that all out at BiggerPocketsMoney.com, and email me if you have any questions at scott@biggerpocketsmoney.com.
All right, that wraps up this episode of the BiggerPockets Money Podcast. Today’s lease on your time has expired, and so I’ll see myself out. That was kind of a reach—reach.
