Displaying items by tag: bearmarket

In an article for MarketWatch, Brett Arends discusses the tradeoffs of traditional real estate investing vs REITs. While many people have built wealth by buying and renting homes, Arends believes that investing in REITs is a better option for most investors given costs and complications.

Additionally, the upside of real estate ownership is less appealing in an environment of higher borrowing costs. Many real estate investors are making the mistake of looking at returns over the past 30 years and projecting them forward. However, the last 30 years saw interest rates decline by a significant margin which is unlikely to be true over the next 30 years. 

REITs offer exposure to real estate as well and have outperformed home prices by about 3% annually. Currently, home prices remain elevated, while REITs are down 40% over the past year in many cases, leading to attractive yields and compelling value. 

Further, REITs are much more liquid and can be bought and sold instantly through any brokerage. In contrast, real estate transactions have massive costs and take time. Additionally, REITs are inherently more diversified than a real estate investment which means less risk. 

Finsum: Brett Arends discusses why the risk-reward equation currently favors REITs over traditional real estate investing given costs, value, and complexity.

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. 

According to research from the Indiana University Kelley School of Business, the current strength in real estate may prove to be transitory. Currently, the housing market has remained resilient despite higher rates due to a demographic bulge and low inventory of available homes. 

However, Indiana University’s research indicates that demographic-driven demand is at a peak. Coupled with low supply, this is likely to drive prices higher in the near-term. However, there is likely to be long-term slowing in demand due to slower population growth and an aging population, barring an unforeseen surge in immigration or household formation.

Additionally, baby boomers are likely to start downsizing, while lower fertility rates also mean that demand for housing will be structurally less. Due to the pandemic and increase in remote work, there was a surge in household formation that exceeded population growth over the last couple of years. This trend is also unsustainable given demographic realities. 

The rise in mortgage rates has also artificially constrained supply as many would-be sellers are not selling due to locking in low rates. Yet, this is simply ‘pent-up’ supply that will be released into the market once rates decline or through the passage of time. 

Finsum: Real estate has continued to hold up well despite deceleration in economic growth and higher rates. However, this state of affairs looks unsustainable in the longer-term.

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.