Telecommunications REITs play a crucial role in supporting the modern digital economy by owning, managing, and leasing real estate critical to telecommunications and data transmission.
Looking ahead, key sector trends are emerging, including the timing for further development of 5G networks, rural connectivity, and the need for more spectrum to meet the insatiable demand for data.
REIT.com asked sector analysts, David Guarino at Green Street; Brendan Lynch at Barclays, and Ric Prentiss at Raymond James, for their perspective on telecom REITs’ performance, sector opportunities and challenges, and trends they’re keeping an eye on.
What is your outlook for wireless carrier leasing activity in the year ahead and how will that shape the overall performance of telecommunications REITs?
David Guarino: I would describe leasing activity as uninspiring. Although there’s new activity occurring, it’s at a much slower pace than in past years. Part of that is attributed to the challenges wireless carriers face in monetizing their investments in 5G. Consumers are using more data on their phones, but carriers struggle to increase wireless bills to cover the costs of network investments. When carriers try to push price increases, consumers push back.
The slowdown in leasing activity is expected to continue until new revenue streams, perhaps AI applications, can be monetized. However, currently there's really no indication of what's going to cause new leasing to re-accelerate.
Brendan Lynch: The carriers have indicated they will continue deploying spectrum throughout 2025 to bolster their networks. This should result in a modest uptick in new leasing activity from the low levels of 2024. Due to the strong operating leverage in the tower business model, this should result in incremental cash flow, all else equal.
Ric Prentiss: We believe 2025 will see higher leasing activity compared to 2024, with the potential for further increases in 2026 as 5G deployment continues to ramp up across the major carriers. T-Mobile continues to lead in mid-band 5G deployment, which will require additional equipment at its cell sites. Verizon is ramping up its deployment of C-band spectrum, which will also drive incremental leasing activity. AT&T is catching up on its 5G mid-band spectrum deployment, which is expected to be a larger driver of leasing in 2025 and 2026.
The timing of when the increased leasing activity will be noticeable may vary by REIT, depending on factors like master lease agreements, amendments to existing leases, and new co-locations at towers.
How might improvements to AI drive new demand and additional revenue streams for telecommunications REITs?
Prentiss: Currently, AI is not benefiting towers or carriers in any significant way. The focus of AI for carriers has been more on cost reduction and customer care, rather than driving new revenue opportunities. The main driver of network demand continues to be video consumption on mobile devices, not AI-related applications. For AI to start driving significant new demand, it would need to enable more video-oriented or latency-sensitive applications that would significantly increase mobile data usage.
The potential future applications include augmented reality, virtual reality, facial recognition, and AI-generated video content. If these types of AI-powered applications become more prevalent, they could start driving increased network usage and demand for tower infrastructure.
Lynch: We could be moving into the phase of AI inferencing, or the operational phase of AI, throughout 2025. Up to this point, AI investments have been mostly focused on training. As more people use the AI models that have been developed, some of that data will come via cellular traffic, which might increase demand on cellular networks. Staying ahead of this growing demand is one reason why carriers are deploying more spectrum.
Guarino: It’s still very, very early. The reality is the early stages of AI development are primarily focused on corporate applications rather than consumer mobile devices. There’s no current consumer application where people are saying, “We can’t live without this.” There’s no AI app yet equivalent to how, for example, Uber increased mobile data usage. Realistically, we're probably a couple years away from a meaningful increase in consumer adoption of AI on mobile devices.
How acquisitive do you expect telecommunications REITs to be this year?
Lynch: The transaction multiples of recent tower portfolio sales are still quite high. We haven't seen “the ask” for these portfolios come down over the past three years with the rise in interest rates, as we have with other types of real estate. So, there's still a pretty wide bid-ask spread for tower portfolios.
Additionally, there’s strong competition from digital infrastructure funds that are eager to increase their tower exposure, making it difficult for REITs to acquire portfolios at attractive valuations in the U.S. However, there may be some opportunities for acquisitions at lower valuations in international markets, although these come with higher churn risk and potential foreign exchange headwinds.
Guarino: Relative to past years, when there were some big, strategic M&A deals, it’s going to be a pretty light year. REITs will focus on smaller portfolio purchases, but nothing that's going to really move the needle in terms of their asset base. One reason is the limited availability of portfolios for sale. Another is that telecom REITs face strong competition from private buyers, who have better costs of capital, limiting REITs’ ability to make big deals make sense.
Prentiss: We don’t expect them to be very acquisitive this year. Public telecom REITs may struggle to be the high bidders on acquisitions, as private companies are often able to pay more because they have a longer investment horizon and generally different views on interest rates. Interest rates are very volatile, but if private investors have a long-term investment strategy, they can usually ride the ups and downs and underwrite with the assumption based on long-term interest rates.
The overall sentiment is that the major U.S. telecommunications REITs will be more cautious about acquisitions in the year ahead, balancing growth through acquisitions versus returning capital to shareholders through buybacks.
How are telecommunications REITs helping to bring high-performance internet to rural and underserved communities?
Guarino: Wireless carriers are using tower sites to provide internet services in areas where it doesn't make sense to lay fiber for home broadband. REITs are not heavily concentrated in rural areas; however, if their tower happens to be in an area where there is not a lot of fiber to homes, rural areas might benefit.
Prentiss: Telecommunications REITs are enabling fixed wireless services, where wireless carriers can use spare capacity on their wireless networks to provide high-speed internet to fixed locations in areas with low population density. This can reach areas that are not economically viable for fiber deployments.
Another way is government programs, which can help subsidize broadband costs for underserved communities. REITs can work with carriers to leverage these subsidies to expand connectivity. In addition, in the most remote, low-density areas where wireless networks are not feasible, satellite connectivity can play a role.
Lynch: The most profitable use of spectrum for wireless carriers is via cellular communication. However, if carriers have spectrum available that’s not consumed by cell phone traffic, fixed wireless access (FWA) presents an attractive second option, and carriers are pursuing FWA in rural and underserved areas. Telecommunications REITs can support carriers’ deployment of additional spectrum for FWA, generating incremental revenue for themselves.
Most of the recent growth for telecommunications REITs has been in international markets, in both emerging and developed markets. What are the future opportunities there?
Lynch: Tower portfolios are still available and cheaper in emerging markets compared to domestic markets, especially relative to the U.S. If REITs are looking to expand, those opportunities are still available. Additionally, build-to-suit projects produce some of the strongest returns in the tower business, and most of those opportunities are in emerging markets.
There’s also the ability to diversify exposure and add incremental revenue by expanding into developed international markets. This can provide growth with less churn and foreign exchange risk compared to emerging markets. However, there are also challenges in international markets including evolving regulatory environments, nuances in each market that require careful consideration, and potential changes in the competitive landscape.
Prentiss: There’s a universal desire for connectivity globally, but gross domestic product per capita and technology adoption rates can vary significantly in emerging and developing markets compared to developed markets. This can impact the economics and returns for REITs when operating in international markets, as average revenue per user (ARPU) tends to be lower.
The risk profile of investing in emerging/developing markets versus developed markets can also impact REITs' cost of capital and willingness to be acquisitive internationally. Crown Castle Inc. (NYSE: CCI) even removed "International" from its name, signaling a potential shift away from aggressive international expansion. American Tower Corp. (NYSE: AMT) may be more selective in allocating incremental capital to international markets, potentially favoring investments in the U.S. data center business, or Europe, over emerging markets.
Guarino: REITs will continue to expand internationally when it makes sense. There are a lot more development opportunities in international markets compared to the U.S. So, smaller M&A deals and build-to-suit development plans with wireless carriers will drive growth in international markets. However, when you look at the smaller scale of these international investments, it may not have a significant impact on the overall asset value of the large REITs.
What are some key opportunities and challenges for telecommunications REITs in the next few years?
Prentiss: The core business of telecommunications REITs isn’t cyclical and is driven by the addictive behavior of using your cell phone. That's a pretty good business model that provides a stable foundation for growth. The continued rollout of 5G, and eventual transition to 6G networks, will create opportunities for incremental leasing activity.
If AI and other emerging technologies drive increased video consumption and mobile data usage, that could present new revenue opportunities down the line. Additionally, healthy balance sheets and financial positions of the major wireless carriers should support ongoing investment in their networks.
On the challenges front, factors like tariffs, foreign currency rates, and interest rate volatility can have an impact. Additionally, regulatory and policy changes, such as the discontinuation of the Affordable Connectivity Program, can adversely impact underserved communities.
Guarino: Opportunities include the increasing demand for data consumption on mobile phones, which requires wireless carriers to make investments in tower sites. The challenge is, when does that happen? If consumers are content consuming as much data today as they are tomorrow, that acceleration doesn't happen as quickly. That uncertainty obviously affects the time value of money and growth prospects. Another challenge is that many REITs have invested outside the U.S., so there’s certainly foreign exchange risk to cash flow.
Lynch: On the opportunities front, telecommunications REITs are well-positioned to capture growing carrier demand, as application activity suggests an uptick in leasing activity. Also, REITS have the opportunity to right-size their exposure. Some companies are exiting underperforming markets while increasing local scale in top markets.
On the challenges side, interest rates are still probably one of the biggest challenges for tower companies because they generally have high leverage and refinancing risk on their balance sheets, while revenue is sensitive to carrier spending (which is dependent on carriers’ access to attractive capital.)