Retail is dying, right? Brick and mortar is doomed, supposedly, but that assumption creates some opportunity. The reality is that despite the broader headwinds the industry is facing, some malls and some REITs are doing well. Macerich, for instance, is a large REIT that owns several “trophy” malls amidst its 47 properties. The stock is trading at just 7x earnings, which incredibly cheap for a REIT. Apartment REITs, for instance, are trading at 20x. Its dividend cover ratio is fairly tight, but its overall model looks solid and it is yielding 10.9%.
FINSUM: There is a lot of opportunity in retail stocks, but you need to know where to look, and it takes quite an understanding of the space to sift through the options. Macerich looks solid.
Hopes for the housing market had been rising strongly in the last couple of months. After nearly a year in the doldrums, existing homes sales rose for a pair of months in July and August, giving the market hope that falling mortgage rates had revived the market. However, in September, sales again fell sharply, with existing home sales dropping 2.2% from the previous month. Prices, however, are rising, as short supply is moving asking prices higher.
FINSUM: Prices are holding up okay, but there is not much buying and building occurring, which means housing will be contributing less to the economy overall.
Is New York a bellwether of US real estate performance or is it an isolated enclave with no real relevance to the majority of the country? Hard to know, but if the former, then there is a lot to worry about. NY home sales are plummeting and just showed their worst decline since the Financial Crisis. Median sales prices in Q3 dropped 12% from the previous year, the sharpest drop since 2009. Average home value fell below $1m for the first time in four years.
FINSUM: In our opinion, this is idiosyncratic to New York. The city is seeing a huge flux of newly built apartments that are boosting inventory, and at the same time there is a new progressive mansion tax hurting demand.
If you have been investing in REITs over the last few years, one of the key driving mantras has been the idea that one should move away from brick and mortar-oriented retail REITs and toward those that are more ecommerce-focused. In other words, buy REITs focused on warehouses, not those on malls. However, that arithmetic might be changing, as the big boom in warehousing is now facing headwinds because of the trade war. Recently was the first time in years that “the market didn’t lease to its full potential”, said a trade group in the space. The sector is “uniquely exposed to trade activity and manufacturing activity, which are very much impacted by the tariffs”.
FINSUM: To us this seems more likely to prove a short-term headwind than a long-term issue given the driving force behind warehouse growth is not actually tied to any trade policy, but a broader change in consumption patterns.
More data has been just released on the US real estate market, and more disappointment. While the market should be rebounding because of the big fall in mortgage rates, the opposite seems to be happening. New home construction fell by the most in five months in July. Housing starts fell 4% despite lower mortgage rates. The fall came despite expectations for growth, and June numbers were also revised downward. An economist at Zillow summarized the situation this way, saying “Scarce land and high labour costs have plagued builders for much of the year, factors that have been exacerbated by unrelenting uncertainty in the global markets … This week’s flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment”.
FINSUM: The market seems to be perpetually slowing, but it has not reversed outright despite over a year of weak data. Time has proved that real estate seems a little disconnected from the rest of the economy right now; in other words, it does not seem to be an indicator of much.
Something discouraging is happening to the US real estate market. Home prices and sales are continuing to be weak despite a huge drop in mortgage rates. Lower mortgage rates should have given a boost to new home sales and construction, but the opposite has occurred. Home price gains and sales have slipped considerably and permits for new construction have fallen 6.6% in 15 months.
FINSUM: The question, as ever, is whether the weakness in housing is presaging an economy-wide recession, or is just an isolated situation. We favor the latter.