Eq: Real Estate
(New York)
Here is a confusing idea: workers are headed back to the office after a year away, but this is exactly the time to stay away from office REITs. One line of reasoning is that buying office REITs now, while prices are depressed, means there will be plenty of upside. However, the issue is that many companies are planning on keeping workers remote indefinitely, as remote work has gone much better than expected, according to many surveys. Office REIT bulls admit that may be the case, but counter than because of the pandemic, employers will want more square footage of office space to allow for more space between workers, helping offset the loss of total workers in the office. Critics say vaccines are working well so extra space will not be needed.
FINSUM: Buying into office REITs now is highly risky strategy, but one that could have major upside if the office market returns strongly.
(New York)
One of the most eye-opening aspects of the pandemic’s impact on the economy has been in housing. The housing market has been on fire since Spring, with a gigantic boom in suburban home sales. The big question is whether this is the start of a sustained trend or a more temporary one. Most analysts think it was just a short-term move. Overall mortgage applications have flattened in recent months at the same time as listings have been rising, showing that supply and demand are changing. Additionally, there is a divergence in the type of demand. Demand for high end homes is stronger, but for cheaper housing it is much weaker.
FINSUM: The pandemic has affected those at the lower end of the socio-economic latter more strongly than those at the top, and combined with how the virus itself has incented social isolation, it is no wonder suburban housing has boomed. That said, it seems temporary almost by definition.
(New York)
The real estate space—at least parts of it—have been red-hot since COVID began. Residential real estate in particular has done well, as the fall in interest rates has sent mortgage issuance surging. One area of residential that you might want to stay away from, however, is apartments. Investors have been shying away from the sector. For instance, the FTSE Nareit Equity Apartments index is down 21% to-date. The big fall comes despite landlords saying rent collections are strong. The reason why seems to be the big rent reductions in coastal cities. Landlords in New York, San Francisco etc have had to drop rents by 15% or more to keep tenants and attract new ones, and that figure doesn’t even price-in other incentives, like months of free rent.
FINSUM: Our view here is that COVID will likely lower demand for urban apartments, since the pandemic highlighted some of the weaknesses of densely populated buildings. However, occupancy overall seems likely to stay strong.
More...
(New York)
Real estate, especially residential real estate, is one of the sectors that has held up much better under COVID than many expected. With such hefty job losses, many thought early on that the market might suffer seriously. However, home prices have held steady, and in a bullish sign, homebuilders are feeling very confident. The bullishness in the sector seems to stem from a pair of factors—desire for single family homes during COVID, and exceptionally low interest rates. The Homebuilders index rose to a measure of 78 in August, up from 72 in July, setting a record that goes back to 1998.
FINSUM: This is a great sign for homebuilding stocks, and the economy more generally. It is a sign that the American consumer—at least the subset that is in the market for houses—is holding up okay. That said, it is the lower end of the socioeconomic hierarchy than seems to be suffering the most from COVID lockdowns.
(New York)
Yields have almost never been lower. In some cases, they are at all-time lows. This has made income-oriented investments a real challenge. So how can investors get great yields right now? Well the first thing to bear in mind right now is that to get really juicy yields, one is going to have to take some risk. With that understood, take a look at mortgage REITs. Mortgage REITs took a huge hit when the pandemic began for fear of declining credit quality in the underlying mortgages. To-date they have only recovered somewhat. However, two of the biggest—Annaly (NLY) and AGNC Investment (AGNC)—are sporting yields of 13.5% and 10.6% respectively.
FINSUM: Mortgage REITs have obvious risks right now given ongoing unemployment, but with prices low and yields high, they look like they have a place in the portfolio.
(Miami)
May was a rough month for the housing market, new data shows. Much of the media narrative has been on the strength of the housing market of late, but the most recent data shows that home sales fell almost 10% in May. Further, home price growth decelerated from 4.6% to 4.5% in the same month. Some economists think home price growth figures are being artificially inflated by the total lack of homes for sale, with inventory very low.
FINSUM: It is hard to tell how healthy the housing market actually is. In one way, it does look healthy, but the lack of inventory and its relationship to prices reminds us when corporate bonds market seize up and there is so little inventory that prices stay “high” because of the lack of liquidity. This is an obvious exaggeration, but there could be some truth in it.