In the latest edition of the Nareit REIT Report podcast, Calvin Schnure, Nareit senior vice president for research and economic analysis, shared his thoughts on the economy, real estate, and REITs in 2020.
In Nareit’s 2020 Economic Outlook, Schnure uses the term “uncharted waters” to describe the current environment. He explained that the phrase underlines the fact that the risks normally faced this far into a typical expansion or commercial real estate boom aren’t present at this time.
“We know there are risks ahead, we just can’t look to the usual corners to see where they are going to be,” Schnure said. He added that because there is no clear idea of when the current expansion might end, the descriptor “late cycle” doesn’t really apply. A more accurate term for the state of the commercial real estate market is that of a “mature recovery,” he noted.
The latest edition of the Nareit REIT Report podcast looked at trends in the REIT health care real estate segment with Michael Gorman, a managing director and REIT analyst at BTIG.
The key theme last year was the differentiation in the underlying performance of health care real estate portfolios, according to Gorman. That trend is likely to remain in place, at least in the first half of 2020, he noted.
In 2020, “we don’t see a groundswell of improvement in any of the particular property types. Senior housing is still going to be pretty choppy at the national level,” Gorman said. However, the medical office building segment should return to external growth in a “more meaningful way” in 2020, he added.
One key factor adding to uncertainty in the health care real estate sector this year is November’s general election, according to Gorman.
While retail real estate faced challenges in 2019, performance varied quite widely across the sector, a trend that is likely to continue into 2020, according to Mizuho Americas REITs analyst Haendel St. Juste.
St. Juste was a recent guest on Nareit’s REIT Report podcast. He highlighted the disparity in performance between regional malls, which faced challenges, and shopping centers, that have had a “formidable run.”
In terms of the regional malls, “there’s lots of uncertainty with key tenants heading into 2020,” he said, while also describing Simon Property Group (NYSE: SPG) as “the most investable company in that space.”
For those investors looking for retail exposure, St. Juste highlights the triple net lease segment, which he feels offers “the best risk-adjusted returns.”
Jonathan Keehner and John Roe, partners at strategic communications and investor relations firm Joele Frank, were guests on the latest edition of the Nareit REIT Report podcast.
Nareit has worked with Joele Frank to create a Communications Toolkit with a framework for developing an effective communications strategy for generalist investors. It was recently distributed to Nareit members.
Keehner described what he sees as a “real disparity between the dedicated investor group and the generalist group.” To help alleviate that gap, he suggests REITs “hit the reset button” and really focus on communicating what makes their company unique.
“It’s about introducing the story and making it compelling, it’s about leveraging the exciting aspects of a portfolio to draw in a new audience,” Keehner said. At the same time, he recommends that REITs take a fresh look at their IR exposure: “It’s [about] doubling down on the existing investor base and then thinking creatively about ways to engage with a new investor base.”
Frank Haggerty, Jr., portfolio manager for all dedicated global real estate securities managed by Duff & Phelps Investment Management, joined Nareit’s REIT Report podcast during REITworld 2019 in Los Angeles.
Haggerty highlighted some of the geographic regions that are expected to perform well in 2020. In the United States, he said, Duff & Phelps is most positive on Southeastern markets. The region is seeing the technology job growth that is evident in other parts of the country, he noted, combined with a strong corporate relocation tailwind as companies seek lower-cost and more business-friendly environments.
As for Europe, Dublin, Madrid, and Barcelona are all markets that are showing potential, he said.
In terms of U.S. REIT fundamentals, Haggerty said Duff & Phelps is watching supply: “Clearly given where we’re at in the real estate economic cycle, supply is an issue in a number of property types,” he said. Growth in jobs and wages are also being closely watched, he added.
Meanwhile, Haggerty said he expects to see a continuation of selective, strategic M&A between public companies next year. IPO activity is likely to also to be limited. “We will see a handful of property deals coming out, particularly if valuations stay at their current level,” he said.
John Guinee, managing director at Stifel, joined Nareit’s REIT Report podcast during REITworld 2019 in Los Angeles.
Guinee noted that the overall REIT market has drifted from a “net asset value (NAV)-based investment bias to a real bias of cash flow growth, dividend growth, and value creation.” Across all property sectors there’s demand from investors for stocks that incorporate these three components, he said.
Turning to the industrial sector, Guinee pointed to in-place rents that are 10%-20% below market value, while land costs are going up, and supply/demand is broadly in balance. At the same time, e-commerce is providing about 60 million square feet of additional demand. “With that backdrop, the industrial REITs are able to generate high FFO growth simply because they have such good fundamentals,” Guinee said.
Multifamily is much the same, according to Guinee, with supply/demand largely in balance and topline revenue growth of 4%-5%. Office REITs, however, are finding it “very difficult” to grow FFO and the dividend.
Andrew Spodek, CEO of Postal Realty Trust, was a guest on the latest edition of the Nareit REIT Report podcast.
Postal Realty Trust owns 366 post office properties across 43 states and was one of only a handful of REIT IPOs that occurred in 2019.
Spodek noted that there are 32,000 postal facilities throughout the country, of which 23,000 are leased and pay about $1 billion in gross rent. Of those 23,000, 16,000 are owned individually, he said: “That’s how fragmented this market is.”
As for the timing of the IPO, Spodek pointed to two key determining factors: a “generational shift” in the ownership of post office assets; and a decision by the post office to outsource its real estate services, “which is very different from what these owners are used to.”
Providing owners with an ability to move their assets into institutional hands “was something we felt was very timely,” Spodek said.
In the latest edition of the Nareit REIT Report podcast, Beth Burnham Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing & Care (NIC), looked at the latest trends and developments in the senior housing sector.
Mace described today’s typical senior housing resident as 83 years old with higher acuity needs than in the past. “Because of the great recession, people delayed the timing of when they moved into senior housing, and that has held to be true even today.”
Occupancy trends have been “relatively weak,” Mace said. In the third quarter, the senior housing occupancy rate was 88%, up from 87.7% in the second quarter—which was the lowest level in eight years. Net absorption of senior housing units in the third quarter was the highest number in a single quarter since NIC began recording data in 2006.
Assisted living occupancy in the third quarter moved off its record low level seen over the prior three quarters to hit 85.4%. Independent living occupancy, meanwhile, was 90.2% in the third quarter.
In the latest edition of the Nareit REIT Report podcast, Jim Berry, U.S. Real Estate leader at Deloitte & Touche LLP, highlighted some of the trends that emerged in Deloitte’s recently released 2020 commercial real estate outlook.
Deloitte based its findings on a survey of 750 real estate owners and operators in 10 major global markets. One of the key trends in the outlook was the importance of tenant experience, with 64% of respondents saying they would continue to increase their investment in tenant experience technology.
“We noted that the clear movement on the expectations of the tenants, as well as the overall end-user, was really impacting the way real estate companies are…continuing to make decisions,” Berry said.
In the latest edition of Nareit’s REIT Report podcast, Gil Menna, co-chair of the REITs and real estate M&A practice at law firm Goodwin, discussed the climate surrounding mergers and acquisitions (M&A) and initial public offering (IPO) activity.
M&A activity has been light in 2019 compared to previous years, in large part due to an “anemic” REIT market performance last year, Menna said.
“Certain sectors in the REIT market have been off. Normally that would result in privatization transactions of public companies that are trading at discounts to net asset value (NAV), but we haven’t seen a significant amount of activity there as well because there has been an abundance of private opportunities available for capital that’s attracted to the real estate asset class,” Menna explained.