Commercial Real Estate and REITs at the One Year Mark in the Pandemic - Calvin Schnure Senior Economist and SVP, Research & Economic Analysis
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© 2021 Nareit. All rights reserved. Commercial Real Estate and REITs at the One Year Mark in the Pandemic Calvin Schnure Senior Economist and SVP, Research & Economic Analysis March 2021
Economic Fundamentals for Commercial Real Estate
The pandemic was an external shock to the economy and to CRE markets. CRE
entered the crisis with solid fundamentals, which will aid the recovery
▪ Traditionally, the three greatest risks to CRE markets are:
▪ Overbuilding
▪ Overheating
▪ Over-leveraging
▪ CRE markets (and the overall economy) turned down in 2020 due
to an external shock, not internal weakness:
▪ Supply and demand were well-balanced in most property markets
▪ Pricing was reasonable with few signs of speculative excess
▪ Both lenders and borrowers had been cautious after 2008-2009; debt growth
moderate
▪ The pandemic has had disparate impacts across property types:
▪ Travel/hotels/entertainment, retail; Digital economy real estate; The rest
▪ Short-term vs long-term impacts
2REITs and the Pandemic at the One Year Milestone
Share prices fell across the board in spring of 2020. Valuations are recovering, but
unevenly across property types
Total Return (%)
Period
Market Cap Feb 21, 2020 - Mar 23, 2020 - Nov 8, 2020 - Feb 21, 2020 -
Index / Property Sector ($B) Mar 23 2020 Nov 8, 2020 Feb 19, 2021 Feb 19, 2021
All Equity REITs 1,187 (41.9) 41.6 11.5 (8.3)
Equity REITs 952 (44.4) 40.9 15.0 (9.8)
Retail 137 (54.6) 25.9 45.7 (16.7)
Shopping Centers 48 (52.0) 11.0 67.3 (10.8)
Regional Malls 38 (62.3) 21.8 77.1 (18.6)
Free Standing 51 (50.3) 41.9 15.4 (18.7)
Lodging/Resorts 38 (56.5) 25.2 72.3 (6.1)
Data Centers 115 (24.8) 53.5 (10.3) 3.6
Infrastructure 200 (28.5) 39.7 (4.4) (4.5)
Industrial 135 (34.5) 58.6 1.8 5.7
Office 81 (43.8) 12.7 21.4 (23.1)
Residential 174 (44.1) 35.4 15.6 (12.6)
Apartments 121 (44.7) 27.5 20.8 (14.9)
Manufactured Homes 27 (40.9) 40.0 5.7 (12.6)
Single Family Homes 25 (44.4) 75.6 4.6 2.1
Diversified 44 (53.1) 33.0 21.6 (24.1)
Health Care 112 (50.6) 43.8 20.1 (14.7)
Self Storage 66 (30.9) 52.0 5.1 10.4
Timber 35 (51.1) 91.4 25.7 17.6
Specialty 51 (56.1) 71.6 20.8 (9.0)
Home Financing 40 (61.0) 53.4 24.0 (25.8)
Commercial Financing 25 (66.2) 90.8 40.5 (9.5)
Russell 1000 (33.7) 62.0 13.7 22.1
3
Source: FTSE, Nareit, FactSet.CRE pricing, Sales Volumes and Capitalization Rates
4Prices and Sales Volumes
Property prices have been stable, rising in multifamily, despite the drop in sales
volumes during the shutdowns
CoStar Commercial Repeat Billions of dollars, Sales Volumes
Index, Sales Index Seasonally adjusted
Dec 2007 = 100
200 Apartment
200
Office
Value weighted 175 Retail
175
Multifamily Industrial
Hotel
Value weighted ex-multifamily 150
150 Total
125 125
100 100
75 75
50 50
25 25
0 0
1996 1999 2002 2005 2008 2011 2014 2017 2020 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Source: CoStar, RCA, Bloomberg, Nareit 5Capitalization Rates and Spreads to Treasury Yields
Cap rates are low, but in a low-inflation, low-yield environment, spreads are
moderate to wide
Percent Cap Rates Spreads to Treasury Yields
Apartment Basis points
12 Office 1,000
Retail Apartment
Industrial 900 Office
10 Hotel Retail
10-year Treasury 800 Industrial
Hotel
700
8
600
6 500
400
4
300
200
2
100
0 0
2001 2004 2007 2010 2013 2016 2019 2001 2004 2007 2010 2013 2016 2019
Source: RCA, Bloomberg, Nareit 6Funds from Operations
All listed U.S. equity REITs
$B
18
Specialty
Data Centers
16 Infrastructure
Timber
14 Health Care
Self Storage
Lodging/Resorts
12
Diversified
Residential
10 Retail
Industrial
8 Office
All Equity REITs
6
4
2
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
-2
Source: S&P Global Market Intelligence, Nareit T-Tracker® 7REITs: Leverage and Debt Maturities
All listed U.S. equity REITs
Months
Percent
90
70
65 Debt/Book Assets 85
Weighted Average Term to Maturity
Debt/Market Assets
60 80
55
75
50
70
45
65
40
60
35
55
30
25 50
2003 2005 2007 2009 2011 2013 2015 2017 2019 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: S&P Global Market Intelligence, Nareit T-Tracker® 8Distribution of Interest Coverage Ratios Across REITs
All listed U.S. equity REITs; Great Financial Crisis vs latest
Percent of REITs
30
2007.4
25 2020.4
20
15
10
5
0
9.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0
Coverage Ratio
Source: S&P Global Market Intelligence, Nareit T-Tracker® 9Work-from-home and CRE Markets
WFH has different impacts on office and multifamily markets across geographies.
Are the effects transitory or permanent?
10Work-from-home (WFH) and Net Absorption
WFH and the pandemic caused a decline in leased office space, esp in Gateway cities.
Demand for apartments was weak in Gateway cities but strong elsewhere
2020:Q1 to 2020:Q4
Percent of stock Net Absorption
5.0 Range
4.0 Weighted average
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
Gateway office Secondary office Gateway Secondary
multifamily multifamily
Source: CoStar, Nareit 11WFH and Vacancy Rates
Vacancy rates rose in office markets and in Gateway apartment markets, but were
less affected in secondary cities—and vacancies declined in many cities
Change, 2019:Q4 to 2020:Q4
bps Change in Vacancy Rates
700
Range
600 Weighted average
500
400
300
200
100
0
-100
-200
-300
Gateway office Secondary office Gateway Secondary
multifamily multifamily
Source: CoStar, Nareit 12WFH and Rent Growth
Office rents declined in Gateway cities, but flat in others.
Apartment rents fell in Gateway cities, but continued to rise elsewhere.
Percent change over 2019:Q4
Rent Growth
7.5
Range
5.0 Weighted average
2.5
0.0
-2.5
-5.0
-7.5
-10.0
-12.5
-15.0
Gateway office Secondary office Gateway Secondary
multifamily multifamily
Source: CoStar, Nareit 13CRE Markets to Watch
Most traditional property sectors will be on path to recovery later this year
▪ Multifamily: Longer-term issues of lack of supply, demographics will re-emerge as
transitory impacts of pandemic fade. Affordability remains a key issue.
▪ Office: WFH to boost flexibility, with some differential impact across major cities,
suburbs and other cities. Impact on demand expected to be moderate.
▪ Retail: E-commerce impact on bricks & mortar retail accelerated during the
pandemic. In-store experiences cannot be replicated online, though, and hybrid
models—order online with curbside pickup—sustain need for store locations.
▪ Industrial: Logistics facilities are a clear winner from the surge in digital
commerce.
▪ Senior housing: Vaccinations will revive move-ins. Cost pressures and labor
scarcity remain, but Baby Boomer demographics are looming.
14CRE Markets to Watch II
Newer sectors, including real estate for the digital economy, are thriving
▪ Data centers: The need for servers for cloud computing surged in 2020 and will
continue to grow.
▪ Cell towers (infrastructure): No slowing in sight for voice and data
communications.
▪ Self storage: The surge in construction 2016-2019 did not approach market
saturation; small size of geographic markets leaves many pockets untapped.
▪ Lodging/resorts: Leisure travel to recover as vaccines allow “catch-up” family
visits and resort get-aways. Business travel may be damped by Zoom.
▪ Specialty: The REIT structure has proven effective and flexible with many property
types outside the traditional core CRE. What new types might emerge?
15Disclaimer
Nareit is the worldwide representative voice for REITs and listed real estate companies with an interest in U.S. real estate and capital
markets. Members are REITs and other businesses that own, operate and manage income-producing real estate, as well as those firms
and individuals who advise, study and service those businesses. Nareit is the exclusive registered trademark of Nareit®, 1875 I St., NW,
Suite 500, Washington, DC 20006-5413. Learn more about Nareit a reit.com. Copyright© 2021 by Nareit.® All rights reserved.
This information is solely educational in nature and is not intended by Nareit to serve as the primary basis for any investment decision.
Nareit is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to
buy or sell any security or real estate investment is being made. Investments and solicitations for investment must be made directly through
an agent, employee or representative of a particular investment or fund and cannot be made through Nareit. Nareit does not allow any
agent, employee or representative to personally solicit any investment or accept any monies to be invested in a particular security or real
estate investment.
All REIT data are derived from, and apply only to, publicly traded securities. While such data are believed to be reliable when prepared or
provided, such data are subject to change or restatement. Nareit does not warrant or guarantee such data for accuracy or completeness,
and shall not be liable under any legal theory for such data or any errors or omissions therein. See Nareit’s Terms of Use for important
information regarding this data, the underlying assumptions and the limitations of Nareit’s liability therefore, all of which are incorporated by
reference herein.
Performance results are provided only as a barometer or measure of past performance, and future values will fluctuate from those used in
the underlying data. Any investment returns or performance data (past, hypothetical or otherwise) shown herein or in such data are not
necessarily indicative of future returns or performance.
Before an investment is made in any security, fund or investment, investors are strongly advised to request a copy of the prospectus or
other disclosure or investment documentation and read it carefully. Such prospectus or other information contains important information
about a security’s, fund’s or other investment’s objectives and strategies, risks and expenses. Investors should read all such information
carefully before making an investment decision or investing any funds. Investors should consult with their investment fiduciary or other
market professional before making any investment in any security, fund or other investment.
16Contact
If you have any questions, please contact
Calvin Schnure Nareit
Senior Vice President, Research & Economic Analysis 1875 I Street, NW, Suite 500
cschnure@nareit.com Washington, D.C. 20006-5413
reit.com
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