Displaying items by tag: realestate

2024 has been underwhelming so far for REITs, as evidenced by the iShares US Real Estate ETF’s YTD 4.5% decline, while the S&P 500 is up 9% YTD. Two major reasons for this underperformance are continued struggles for the office segment and less clarity about the outlook for monetary policy, following a series of stronger than expected labor market and inflation data.

However, the intermediate-term outlook for the sector remains favorable due to attractive yields and earnings growth despite a challenging, near-term environment. Further, most segments are in good shape. According to Steve Brown, the senior portfolio manager at American Century Investments, “The REIT industry is very diversified among different sectors like data centers, towers, and industrial, and office is only about 4 or 5 percent of the index. So while office has issues, many other property sectors have pricing power and can raise rents greater than inflation.” 

He also favors public REITs over private REITs, as public REITs are cheaper while offering more liquidity. He notes that many private REITs are still trading at or just above net asset value (NAV), while public REITs are trading at an average 20% discount to NAV. Overall, he sees a much more benign environment in 2024, especially once the Fed starts cutting rates.  

Finsum: REITs have had a rocky start to the year. However, the fundamentals for the sector continue to improve, while many of its challenges are already reflected in depressed valuations.

In an article for SeekingAlpha, Armada ETF Advisors make the case for why public real estate is due to outperform vs private real estate given the gap in valuations. Over the last couple of years, the combination of the Fed’s rate hiking campaign and weakness in segments of the real estate market like commercial real estate have led to major drawdowns for publicly traded REITs. 

In contrast, private real estate has fared much better. According to Armada, these types of wide differentials in performance have been reliable indicators of mean reversion, historically. In addition to favorable valuations, the firm also believes that the headwind of higher rates is about to recede given trends in inflation and budding signs that a recession is imminent.

Over the last 2 decades, there have been 8 instances when REITs underperformed by more than 10%. Each instance was followed by a period of strong REIT performance in absolute and relative terms. 

It’s also a rare opportunity for investors to acquire high-quality real estate assets at cheaper prices than what is available in private markets. Typically, the situation is inverted given the greater liquidity of publicly traded REITs. 

Finsum: Private real estate has outperformed public real estate by a significant amount over the past year. But, it could be an indication that a major mean reversion is imminent. 

In a CNBC interview with Sara Eisen, Goldman Sachs CEO David Solomon warned that there was more pain ahead for commercial real estate. The bank is marking down its holdings as the sector faces a torrent of headwinds. 

The most notable include the rise of remote and hybrid work which is structurally reducing demand for office space. E-commerce continues to take a greater share of spending which is affecting retailers with physical locations. Finally, higher rates have also added to the industry’s woes as many owners are defaulting on properties rather than refinancing loans. 

Due to this, the bank is posting impairments on its loan book and equity holdings which will impact its upcoming results. In the first quarter, the bank wrote off nearly $400 million in real estate loans. Solomon believes that other banks will also be making similar moves.

However, Solomon sees the challenge as being manageable and not significant enough to thwart Goldman’s overall business. But for smaller banks, it could be a bigger problem since they tend to be more heavily exposed to commercial real estate. 

Finsum: Commercial real estate is facing a tough time due to higher rates and reduced demand for office space. In an interview, Goldman Sachs CEO David Solomon shared how the bank is dealing with the challenge. 

Ethan Roberts covers the weakness in office REITs over the past couple years in a Benzinga article and whether there is any opportunity to buy the dip. To recap, the sector’s struggles began due to the pandemic with remote work gaining in popularity, leading many companies to downsize or abandon their offices.

Not surprisingly, office REITs were crushed and their struggles were exacerbated by high interest rates. Many of these REITs dropped more than 50% and are trading below their March 2020 levels, despite the broader market being substantially higher. 

However, some contrarians are turning more optimistic on the sector. They believe that valuations have become very compelling especially given that public market valuations are much cheaper than private markets. Additionally, there are increasing signs that corporations are pushing back against remote work culture by insisting that workers must go to the office at least a couple of times per week. 

In addition to this, real-time metrics like metro ridership and miles driven also seem to confirm that more workers are returning to the office. Finally, with increasing cracks in the labor market and expectations that the unemployment rate will increase over the next year, workers have less leverage and may be forced to return to the office. 

Finsum: Office REITs have been crushed over the past couple of years due to the pandemic and high rates. Now, there are some reasons for optimism.

Commercial real estate was facing serious issues at the end of 2021 due to the increase in remote work and changes brought about by the pandemic. This resulted in a situation of excess inventories amid declining demand. However, these issues have been exacerbated by recent bank failures.

In a MarketWatch article by Joy Wiltermuth, she covered a research piece by Lisa Shalett, the Chief Investment Officer (CIO) at Morgan Stanley Wealth Management, who warned that commercial property prices could drop by as much as 40% and even have negative effects for other parts of the economy. 

Shalett’s concern centers around the trillions of dollars of commercial mortgage debt set to mature over the next decade. And, the pressure is more acute in the current environment especially given high rates. 

In terms of the broader economy, Shalett sees collateral damage from offices at depressed occupancy levels in terms of the businesses and municipalities that rely on people working in the cities. In her opinion, the stock market’s performance in Q1 reveals that investors are being ignorant of these risks. 

Finsum: Morgan Stanley’s Lisa Shalett lays out some concerns over the commercial real estate market, why it could get worse, and its potential broader impacts on the economy.