The real estate industry has been literally turned upside down over the past few years, first driven by the post-COVID residential housing market mania to the imminent bust in the commercial real estate market. In addition, rising interest rates have impacted everything from home affordability to capital access for commercial developers. What better time to bring Jeff Langbaum, the Senior REIT Analyst at Bloomberg, into the ETF Think Tank to talk about the state of the industry and where the biggest trouble spots lie.
In terms of what the overall REIT marketplace looks like, Langbaum says that if you focused only on what you hear in the financial news, you’d think that everything is office buildings, there’s no capital available, and everything is going to zero. While that’s somewhat true in office space, it is not true elsewhere. Industrial warehouse demand is still huge. Senior housing is another big growth area. Many rents are continuing to grow, so there’s still potential there as well. The biggest challenge right now is getting an accurate assessment of property values because so few properties are actually changing hands.
A lot of why parts of the real estate market are seizing is the disconnect of expectations between buyers and sellers. Buyers only want to pay a price based on their perception of current market conditions. A lot of sellers are still holding out until they get their asking prices. Many people don’t understand how or why values are coming down and that’s contributed to a significant drop in activity.
Higher interest rates will impact property owners & developers because of the need to refinance existing debt. Langbaum says this phenomenon is already happening. He notes that REITs tend to operate with less leverage than private real estate, so they may be less impacted. They also have better access to capital. In a situation where you may need to maintain a minimum loan-to-value, you’ll need to either put up incremental value or walk away. Some are already starting to do the latter. REITs may end up being the provider of capital by bailing out developers who are coming up short.
Right now, Langbaum says there’s a massive variability in yields. He says that the income generated doesn’t react as quickly as share prices react. In some cases, yields may have spiked because dividends are elevated at the same time that share prices took a beating. Some REITs may need to decide if paying cash is the best use of capital. Paying dividends in stock instead of cash might develop into a new trend.
What are some of the weaker regions in the market right now? San Francisco is a major problem for many reasons. They got a little bit of a reprieve during the AI boom, but I don’t think that sustains for long. San Francisco is a big market for REITs, but it’s going to take a lot to get that market turned around. Tech companies are slowly becoming less willing to let people work remotely and that could change the environment. In New York City, there’s strength in residential housing and concerns about office space. The Sun Belt is setting up for a cooling period after the rush of people wanting to move there during COVID. Until the coastal assets fall into the water, demand in Miami is still through the roof.
Other key takeaways:
- The trend towards converting office space into living space can’t happen quickly. It might be easier for older buildings, but it won’t be the panacea that everyone is hoping for. It will likely happen, but to a much lesser degree.
- International REIT players and property owners are going through a similar dynamic to that of the United States even though some factors may vary.
- Another potential source of supply/demand could come from households where the homes are paid off. They can relocate without taking out a new loan if they’re downsizing.
- Insurance costs are going to be a big issue coming in some of the southern markets. Premiums on Florida apartments are doubling each year.
Everybody is waiting for rates to come back down, but Langbaum doesn’t feel like we’re getting there anytime soon.
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