Eq: Real Estate
(New York)
Hotels are increasingly in trouble. About a quarter of all hotels in the US are now behind on their loan payments. COVID has obviously had a huge effect on hotel occupancy rates, which is now causing financial difficulties for the hotels and their lenders. The situation echoes other data from across the commercial real estate sector. For instance, Vornado Realty Trust yesterday said that it had only collected 53% of retail rents in April, and 90% of office rents.
FINSUM: We think it is critical to remember that re-opening is not a sign that all is clear in commercial real estate. Even once they re-open, restaurants and retail stores are still very likely to be doing MUCH less business than before they closed, and since a lot of cash reserves have probably been used up, their financial situation and thus the sector are just going to grow more precarious.
(United States)
A lot of calculations are being done to see which states will be most hard hit by the current coronavirus lockdown. Within those assessments it is becoming clear that specific housing markets will be hit hard too. The states that look likely to have their housing markets fall the most are New Jersey, Maryland, and various counties elsewhere in the mid-Atlantic. Specifically, Sussex County (NJ), Charles County (MD), Atlantic County (NJ), Passaic County (NJ), Rockland County (NY), Orange County (NY), and Sussex County (DE).
FINSUM: These are all the locations you’d expect. The percentage of income it takes to manage a mortgage and other ownership expensive is quite high in these areas, so there is going to be a surge in delinquency.
(New York)
After about three years of being a laggard and worrying investors that a recession may be coming, US real estate looks to be turning the corner. Not only have home sales been rising, but new mortgage data looks very encouraging. Home lenders extended $2.4 tn in new home loans last year, the most since 2006. That figure is a whopping 46% increase from 2018. One economist from Freddie Mac described the situation bluntly, saying “When a large and cyclical part of the economy—housing—is starting to improve, it’s a good sign for the economy at large”.
FINSUM: It is important to note that most of this was refinancing activity because of the drop in rates, so it is not as massive an increase as it appears. Still, good momentum.
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(Atlanta)
US Real estate has been a worry spot for the last few years. For the last three years or so everyone thought real estate might be the initial signal that the economy was headed lower. However, that never materialized and real estate has been looking modestly better for the last several months. The end of 2019 continued that streak as existing home sales rose 3.6% in December as low unemployment helped support the housing market.
FINSUM: We think the housing market is just solid and steady right now. No huge speculative gains, no gigantic increases in debt etc. It is a nice contrast to publicly-traded securities!
(New York)
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.
(New York)
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.