A look at what will happen next in the world economies
Sunday, May 28, 2017
After a Brief Respite, REITs Resume Decline
With the ecommerce disruption this should not be a surprise..... Aivars Lode
Retail REITs have been hit by store closings, while data center landlords have fared well
Shares of real-estate investment trusts have slumped this year as a postelection sugar rush wears off.
The S&P U.S. REIT Index has fallen 1.3% so far this year. It rose 4.2% last year. Meanwhile, the S&P 500 stock index has risen 6.9% so far this year, after a 9.5% increase in 2016.
REITs have had a tough time for most the past two years as investors increasingly worried about rising interest rates, which make it more expensive for REITs to borrow.
After the election, the sector bounced higher as investors rejoiced over the prospects of a looser regulatory environment and fiscal stimulus. But the rally fizzled as investors began to worry anew about rising rates. What’s more, concerns are growing that the commercial real-estate market might have peaked, given that the sector had been a beneficiary of easy monetary policy for the past several years.
Concerns about a potential “border tax,” meanwhile, are weighing on sectors that are more exposed to trade and U.S. dollar’s strength to other currencies, such as retail and lodging REITs.
“While corporate profit growth recently turned positive again, hotel fundamentals haven’t yet seen a boost in business demand,” said Lukas Hartwich, an analyst at real-estate research firm Green Street Advisors. He noted, however, that a pickup in demand could be seen in the summer as corporate profits continue to rise. Business travel accounts for three-quarters of demand of higher quality hotels that REITs own.
To be sure, employment, inflation and wage growth in the U.S. have remained at healthy levels, supporting demand for commercial and residential real estate and keeping mortgage delinquency rates low.
And rising interest rates are usually followed by positive returns for REITs, said Brad Case, Senior Vice President of Research and Industry at the National Association of Real Estate Investment Trusts. “It’s because the macroeconomy is strengthening, conditions are improving and that’s a good thing for REITs,” he said.
Yet within REITs, the prospects of some sectors are showing signs of fading. Retail REITs have been pressured by thousands of store closings as retailers that over-expanded two decades ago suffer from the move toward online shopping.
Industrial REITs haven’t fared as well as the 31% total return the group recorded last year. Higher levels of construction activity could point to the end of an earnings boom driven by scarcity of available warehouse space.
“E-commerce sales have skyrocketed and appear to have pushed demand for warehouse space over the edge, as construction spending on warehouse assets has escalated considerably since early 2014,” said Karina Estrella, an analyst at real-estate data provider Trepp Inc.
In all, more than 200 million square feet of industrial space was delivered last year and additional supply could stunt rent and occupancy growth in the future, she said.
On the other hand, data center landlords have outperformed other real-estate investment trusts so far this year, as investors eye higher earnings from tenants beefing up their capacity to host an increasing amount of online traffic and mobile transactions from consumers.
The rising consumption of video and large businesses launching their own Internet-of-things cloud platforms are also driving demand. These data centers house servers and network equipment, and usually have leases that range from five to more than 10 years with tenants such as IBMCorp. , Oracle Corp. , Verizon CommunicationsInc.,AT&TInc., and other tech giants like Amazon.comInc. and FacebookInc. that have investment-grade credit ratings.
While construction activity is picking up pace, absorption levels, or the rate at which new supply is taken up, are healthy as demand continues to outpace supply, said Bill Stein, chief executive officer at Digital Realty Trust Inc., a San Francisco-based data center REIT, in an earnings call last month.
“Scars from the last cycle are still fresh,” Mr. Stein said.
By Esther Fung - Wall Street Journal - 23 May 2017