Displaying items by tag: rate hikes

One of the most puzzling developments over the past 18 months is the wide gap between public and private real estate. Many publicly traded REITs are down between 30% and 40% from their highs in 2021, while private real estate funds are flat or have losses in the single-digits. 

There are a variety of theories to account for this disconnect, including expectations of mounting losses in commercial real estate (CRE) given that office occupancy rates are not returning to pre-pandemic levels. However, it’s also fair to note that in recent months publicly traded REITs have outperformed and somewhat shrunk the gap. In Institutional Investor, Hannah Zang covers why many investors are seeing an opportunity in REITs and believe that the market is overreacting to weakness in CRE especially given that it only accounts for 3% of the total REIT market.  

Currently, the cap rate for REITs is 50 basis points higher than private real estate. Historically, this has indicated a buying opportunity in the sector especially as some of the macro headwinds of the sector seem to be dissipating with the vast majority of real estate prices holding steady and the Fed in the final innings of its rate hike cycle. 

Finsum: There’s an interesting divergence between private and public real estate. However, many investors see opportunity in publicly traded REITs and believe that investors have overreacted to macro and CRE issues.

A combination of factors like high rates and weakness in commercial real estate have conspired to push REITs lower over the past year. Yet, many billionaire investors are seeing this weakness as an opportunity to scoop up shares as discussed by Jussi Askola for SeekingAlpha.

He notes that Blackston’s Jon Gray and Steve Schwartzman have bought more than $30 billion of REITs over the last 18 months. Interestingly, they see more value in public REITs than private real estate which makes sense given greater drawdowns.

Similarly, Brookfield Asset Management’s Bruce Flatt has also been aggressively buying REITs and remarked in a recent interview that “I would say one of the great purchases today is real estate securities because you are buying them at a fraction of what you would trade them at in the private sector. REITs that have high-quality assets trade at enormous discounts to the tangible value of their assets".

Starwood’s Barry Sternlicht shares this bullishness as well. In a CNBC interview, he said that “There are some unbelievable bargains in REITs. We are already buying some stuff in the public market because I do think that rates are going down." 

Overall, these investors tend to have a more long-term perspective and have also managed to thrive through multiple cycles. It’s clear that many billionaires see current weakness as temporary and see REITs as a big winner once the Fed starts cutting rates. 

Finsum: REITs have been punished over the past 18 months, but some billionaire investors are growing increasingly bullish on the sector due to compelling value and belief that a positive catalyst is around the corner.

Every industry is dealing with the consequences of higher inflation and interest rates. Private real estate is no exception as construction and financing costs have soared. For Private Equity & Real Estate News, Peter Benson shares how the industry is grappling with these challenges and whether it will start to impact returns. 

Although inflation has been trending lower for the past few months, builders continue to grapple with higher insurance costs especially in certain coastal markets. Many are finding that insurance rates have doubled or tripled in certain cases especially as incidents of extreme weather increase. 

Another headwind has been an increase in property taxes as many local governments are dealing with lower tax revenues. Overall, rents have not increased enough to offset these additional costs, resulting in less income for landlords. Additionally, there is a glut of multifamily units that are coming online in major markets, leading to less opportunity to raise rents. Further, rents are at a historically high level relative to income which is also an indication that they cannot be further increased. 

Many private real estate fund managers are dealing with the challenging environment by prioritizing cash management to ensure that they have enough reserves to get through the current environment and take advantage of dislocations that emerge in the coming months. 

Finsum: Private real estate operators are dealing with a very challenging environment given that rents cannot be further raised, while rates are elevated. Another burden is that insurance costs have doubled or tripled in many cases.

In SeekingAlpha, Jussi Akola discusses the opportunity in REITs and identifies some that are yielding more than 8%. REIT stocks are down significantly over the past 18 months due to higher rates and increasing pessimism around real estate prices. Yet, prices have remained resilient despite these headwinds. Additionally, many REITs continue to increase their dividends and are quite attractive on a valuation basis.

And, there are some indications that the macro environment is improving. For one, recent economic data in terms of mortgage applications and housing stars has shown an uptick. Longer-term trends in terms of inflation and the economy also support the notion that the Fed is close to the end of its tightening cycle which should be a boost to the sector as well.

Akola likes Global Medical REIT which is a REIT that invests in medical offices in secondary markets and has an 8% dividend yield. By investing in less competitive markets, it has higher cap rates with less competition from new projects. Additionally, longer-term trends around medical spending are also supportive given the aging population and long-term trend of healthcare inflation outpacing inflation.

Finsum: REITs have significantly underperformed over the past 18 months. Yet, some investors see value in the asset class due to an improving macro environment.

Over the last year, Elon Musk has been increasingly pessimistic about the US economy and warning that a more severe downturn is coming. Recently, he warned that the prospects of commercial real estate would suffer due to a lack of financing given stresses in the banking system, and workers who are not returning to offices. In an article for TheStreet, Luc Olinga covers Musk’s thoughts on the matter.

Now, the Tesla founder and CEO is also warning that the residential real estate market could face similar pain as inflation and a weakening economy mean that demand will be tempered, while supply is artificially constrained as homeowners with low mortgage rates are unwilling to sell. 

He sees the same underlying factor negatively impacting residential real estate and commercial real estate - banks raising their lending standards which curtails demand. This would lead many prospective buyers to fail to qualify for a mortgage. 

On top of this, there are a myriad of other economic stresses such as inflation and higher rates leading to higher costs and payments. At the same time, Musk sees it as inevitable that the labor market experiences its own downturn, adding to pain for the US economy and housing market. 

Finsum: Elon Musk has been quite vocal in warning about risks to the economic outlook. He recently shared why he thinks residential real estate could follow commercial real estate lower.