Home Featured Technical Backdrop Remains Uncertain in REIT Space Says Barclays

Technical Backdrop Remains Uncertain in REIT Space Says Barclays

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Last week, Barclays met with 22 management teams at NAREIT’s REITWeek conference in New York. Most of the meetings, the firm says, were relatively constructive and in-line with what the company expected—solid demand and disciplined supply resulting in a favorable fundamental backdrop across most property types.

With that said, the firm says in its roundup report that the technical backdrop remains uncertain, therefor Barclays “takes a neutral view on the space overall.”

Some of the company’s many takeaways by subsector are as follows.

NAREIT vs. ICSC. According to Barclays, the content was the same, but with a less defensive tone. “With ICSC having taken place two weeks ago, the follow-up meetings we had at NAREIT were not materially different in subject and content (e.g. impact of retail store closures, department store woes, the ability to redevelop spaces accretively). That said, the tone from managements across several of our meetings appeared less defensive.” Generally speaking, Barclays thought managements spoke more openly and persuasively about how many of these retail store closures will positively impact their portfolios from a longer-term perspective. Also, the company said that several REITs enhanced their disclosure on the impact of retail store closures in their supplementals to showcase the minimal impact and disruption that is occurring from the announced store closures.

Also on the retail front, in the meeting with Macerich, Ed Coppola reinforced the idea of haves and have nots. In his view, Barclays said that “there are some portfolios facing serious issues. Retailers are closing stores and these landlords will have issues backfilling these spaces. Meanwhile, class A assets are largely insulated. While 2017 represents a new high for industry wide retail store closures, MAC actually has a lower number of stores closing in their malls this year.”

On the multifamily front, leasing momentum is largely in line with guidance through May. The company said that during NAREIT, most apartment REITs provided an intra-quarter update to investors on leasing during the peak season. “On balance, we got the sense that most of the apartment REITs we cover were on track to meet or exceed their same-store revenue guidance for FY2017 through May. In that vein, EQR – which reduced guidance three times in the spring/summer on 2016 – said that all of its markets are at or above its internal forecast except for Washington DC. Generally, the two key markets that underperformed in 2016 (NYC and San Francisco) appear to have stabilized somewhat in 2017. Notably, AIV lowered its 2017 SSREV guidance by -45 bps to +3.3%, though this appeared to be largely baked into the current valuation; the stock outperformed on the news (+0.1% on 6/6/17 vs. -1.3% for the apartment REIT peer average).”

Pertaining to new multifamily supply, Barclays says that on the heels of persistently high national multifamily permits, they asked each management team if they believed the historical ratio of permits to starts would decline. Given tighter lending standards and wider spreads on construction loans, and rising labor costs, most managements believed that the ratio would come down. In particular, the firm says that ESS management noted that its markets already have a much lower conversion ratio than the national average (~70% in ESS markets vs appx. 85% nationwide). To that end, Barclays says that most managements said that supply deliveries should abate in 2018-2019 – though most stopped short of predicting a reacceleration in rent growth given the broader macro uncertainty.

On the industrial front, Barclays said that new supply is indeed rising, but only presents a concern in certain markets. “The market for well-located, coastal industrial real estate near the end consumer remains very tight. PLD management believes that cap rates continue to drift lower in key industrial markets and occupancies remain at record highs,” Barclays says. “The landlords retain pricing power – in fact, PLD suggested that tenants are struggling to find available space, often renewing very early to lock in rate sooner. The company is also becoming more selective on lease terms, including tenant credit, given what appears to be strong negotiating leverage. PLD believes that market rent growth will meet or exceed 3% in 2017, with a bias toward beat, and that similar growth is likely in 2018.”