Further on the Returns to Non-Traded REITs: A Reply

Abstract

Selman (2022) claims that Further on the Returns to Non-traded REITs contains four fundamental errors related to our treatment of non-traded REITs as a group and our choice of benchmark, time period and terminal valuations. In this Reply, we address each of these alleged errors. Non-traded REITs and traded REITs compete in the same market for portfolio assets and thus the two groups of REITs have similar underlying asset risks and gross returns. Comparing non-traded REIT returns to traded REIT returns allows us to isolate the impact of non-traded REITs’ high costs and illiquidity on investors after controlling for the risks and gross returns common to non-traded REITs and traded REITs. Non-traded REITs underperformance relative to traded REITs remains when disaggregating NAV REITs from Lifecycle REITS. Moreover, the shortfall we documented for the 64 non-traded REITs operating as of May 1, 2015 grew during the COVID pandemic—from $36.5 billion as of December 31, 2019 to $55.5 billion as of December 31, 2021. We provided our shortfall estimates based both on reported NAVs and secondary market transactions but continue to stress that secondary market transaction prices are most relevant to assessing the returns to investors.