Nareit's REIT Report Podcast

CBRE Chief Global Economist and Head of Americas Research Richard Barkham and CBRE’s Head of Occupier Research, Americas, Julie Whelan, joined the REIT Report on March 27 to talk about the economy, commercial real estate, and the impact of the coronavirus pandemic.Barkham described the economic impact as “brutal in the short term,” with GDP in the United States likely to contract by 6.3% in the first quarter and 20% in the second quarter. If new COVID-19 infections begin to fall by mid-to-late April, and lockdown situations start to ease from mid-May, “we’re looking to an improved second half and a very strong 2021,” he said.Fundamentals in the real estate sector were strong heading into the crisis, Whelan observed, as she pointed to solid occupancy levels and a disciplined approach to construction. “All of that has set us up to weather the storm that we’re in quite well,” she said.

In the latest edition of the REIT Report podcast, Nareit Senior Economist Calvin Schnure said the ultimate economic and financial impact of COVID-19 will be unclear until there is more progress on the public health front. Authorities, meanwhile, are acting quickly to support the economy, including the resurrection of the Federal Reserve’s crisis programs, Schnure noted.“The most important impact on the economy is the short-term cash flow problems for businesses that rely on face-to-face interactions with the public…it is encouraging that authorities are acting quickly to support the economy through this period,” Schnure said.

In the latest edition of the Nareit REIT Report podcast, Chris Caton, global head of strategy and analytics at Prologis, Inc., discussed the impact of COVID-19 on the warehouse and logistics industry.The current uncertainty is likely to be a headwind for the economy and all forms of real estate, logistics real estate included, Caton said.Caton pointed out that logistics real estate has benefited from historic low vacancy rates and strong demand and disciplined supply. Potential customers who have had a difficult time securing space up until now may see that situation change, he said.Investors, meanwhile, are likely to recognize “the relative beneficial attributes of logistics real estate in terms of the long-term demand drivers against other categories that have more uncertainty,” Caton said.

In the latest edition of the Nareit REIT Report podcast, Nareit senior economist Calvin Schnure highlighted the latest developments surrounding the impact of the coronavirus pandemic on the economy and REITs.Schnure emphasized that this is first and foremost a public health crisis, but also one which is impacting the economic and financial livelihood of tens of thousands of people.The situation is changing quite rapidly, Schnure said. He noted that his analysis as of March 12 is different from what it was just a few days ago.Schnure noted that a pandemic of the current scale hasn’t been seen before in modern history.“The experience in several other countries …is that it is possible to slow the spread of this virus and that will limit the effect on the economy, commercial real estate, and REITs,” Schnure said.

The latest edition of the Nareit REIT Report podcast looks at developments surrounding opportunity zone investing with Dan King, senior manager, national tax services, at CohnReznick LLP.Opportunity zones were created by the Tax Cut & Jobs Act of 2017, and final regulations were released by the Treasury Department and the IRS at the end of December 2019.“The final regulations have answered a lot of the uncertainties in the market,” King observed, and include “a lot of taxpayer-friendly aspects.”While there are still some aspects that need to be clarified, overall the final regulation package has been “very well received by the industry,” which has resulted in CohnReznick “getting a lot more questions coming in, and a lot more people interested in doing deals,” King said.In terms of the types of investors being drawn to opportunity zones, King pointed to interest from family offices, real estate developers, and closely-held businesses.

Nareit’s vice president for research, Nicole Funari, joined the latest edition of the REIT Report podcast to discuss some of the findings from Nareit’s latest REITs Across America data, including the contribution that REITs make to the U.S. economy, their geographic footprint, and their shareholder base.Funari noted that the number of REIT properties has increased every year since Nareit began counting in 2016. The latest data shows over 520,000 REIT properties, comprised of 207,000 actual buildings, 219,000 signs or billboards, and 95,000 cellphone towers.Traditional REITs still have the highest level of gross asset value, according to Funari, but some of the newer sectors like data centers have shown the most growth over the past three years. Lodging has also shown large growth in gross asset value, as has retail, which has posted the second highest growth rate over the past three years. While the value of traditional mall and shopping center assets are down, there has been an uptick in the gross asset value of single tenant retail and restaurants, Funari explained.

While the growth in the supply of short-term rental (STR) units has tempered in recent years, the STR market is an important factor in valuation calculations for the traditional lodging sector, according to Jamie Lane, senior managing economist of CBRE Americas Hotels Research.Speaking on the Nareit REIT Report podcast, Lane noted that with a bigger inventory of STR units now in place, year-over-year percentage growth rates for STR supply in the U.S. will continue to ease. STR unit supply grew by 26% in 2019, down from 39% in 2018, and down from the seven years of exponential growth prior to that. The rate of supply growth is expected to slow in 2020 to 19%.Despite the slower growth rate, new units have still averaged over 100,000 per year since 2016, with 2020 marking the fifth consecutive year that this threshold has been met. As a result, the supply penetration rate of STR units to traditional hotel units reached almost 10.5% in 2019 and is expected to hit 12.2% in 2020, Lane said.In 2014, the vast majority of STR units were coming online in urban areas. Lane notes that since then, most of the growth has primarily occurred in rural and suburban areas. Urban units dropped to 21% of the total STR supply in 2019 from 46% in 2014.

The latest edition of the Nareit REIT Report podcast looked at real estate deal activity with Tim Bodner, U.S. real estate deals leader at PwC.Although the volume and value of commercial real estate deals in 2019 were lower relative to 2018—a particularly strong year—activity was higher than in 2017. Most of the decline in 2019 came from the lodging and retail real estate sectors. In retail real estate, transaction value was down 31%, while falling 15.5% in the lodging space. On the other hand, the value of logistics transactions rose 13% in 2019. Nearly all other real estate sectors logged a decline in transaction value in 2019, according to PwC.In 2019, nine REIT M&As took place, representing about $24 billion in value. About 70% of that total represented the logistics sector.Fundraising by public REITs from January through November 2019 hit $107.3 billion, or nearly twice the total for all of 2018 and 7% higher than the previous peak in 2017.

After underperforming in 2019, the lodging and resort REIT sector is on a similar track in the first few weeks of 2020, according to Evercore ISI managing director Rich Hightower.In the latest edition of the Nareit REIT Report podcast, Hightower said he expects no more than a 1-2% increase in room night demand in 2020. Supply, meanwhile, is increasing at a 2-2 ½% range, and more so in some of the urban markets.“It seems to be hard to argue for ADR (average daily rate) improvements in a declining occupancy scenario,” Hightower said. He noted that the industry didn’t see much pricing power at all in 2019, and that was at a time when occupancies were still growing. Consequently, RevPAR is likely to be flat to lower in 2020, according to Hightower.Meanwhile, Hightower noted that TRevPAR (total revenue per available room) became a mainstream statistic that companies started to report in 2019. It captures non-room revenue and is growing at a rate in excess of RevPAR, he said.

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.