The retail REIT sector can expect to see more M&A in 2021 and beyond, following two merger agreements in April: Kimco Realty to purchase Weingarten Realty and Realty Income to buy VEREIT. The reason more M&A is on its way, according to JLL Capital Markets’ latest M&A and Strategic Transactions Monitor report: a favorable cost of capital.

That’s quite a reversal from a year ago, when the pandemic had investors wary of putting money into retail properties, said JLL managing director Sheheryar Hafeez. During the past 12 months, retail, office and hospitality REIT stocks underperformed industrial, data center and life sciences REITs by 24 percent, he said.

That trend changed in November. With the vaccine rollout and an improving economy, these previously out-of-favor stocks are showing significant gains. For example, retail REIT stocks have gained 46 percent year to date, office 16 percent and hospitality 17 percent. Collectively, multifamily, hotels, malls, offices, open-air shopping centers and gaming REITs in gateway markets have made strong comebacks, their stocks outperforming the REIT sectors that had been in favor before by 14 percent. “We are seeing this cyclical rotation among the previously out-of-favor sectors, and it’s a positive message to broader real estate that everything is starting to improve,” Hafeez said. “The expectations of ‘back-to-normal’ economic activity [are] leading investors to bet on these sectors rebounding.”

REIT M&A has totaled $70 billion year to date, putting 2021 on track to be a record-breaking year, according to JLL. “The record in this economic cycle was set in 2006 when REIT M&A volume reached $103 billion for the year,” said JLL M&A and Corporate Advisory head Steve Hentschel. REIT stocks “have enjoyed a strong run in 2021, up almost 22 percent, which is contributing to a rebound in M&A activity.”

Also, most major REIT sectors are trading at a premium to net asset value. That occurs when the market price on the exchange-traded REIT surpasses analyst expectations of NAV, said Hentschel. Retail and hotel REITs have had the highest positive change in their cost of capital, according to JLL. From February 2020 to June 2021, the change in the premium to NAV shows retail, hotel and office REITs outperforming REITs from other sectors. A premium to NAV generally implies a green light for REITs to pursue growth opportunities, including M&A, Henschel said.

The cost of capital has become increasingly attractive for retail REITs over the past 15 months, according to JLL. Since February 2020, REITs raised more than $28 billion in equity and more than $88 billion in unsecured debt and, despite recent headlines regarding rising interest rates and volatility in the equity capital markets, REITs have not been affected negatively.

That may be counterintuitive at first glance. REITs are benefiting from rising inflation, and data supports this theme. This means the cost of equity and debt for REITs is likely cheaper today than in 2020 and REITs are in a healthy spot to take advantage of various geographic markets reopening.