Economics, Housing, & Commercial Real Estate Analysis

Keepin' It Real 

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  • Alex Pettee, CFA

Good News Amid Market Panic [Daily Recap]

  • The coronavirus-related selling intensified on Thursday as U.S. equity markets dipped into correction territory with the major averages now lower by roughly 10% on the week.

  • The sell-off continued despite generally positive news out of China on virus containment and no additional evidence of a more serious outbreak in the U.S. for the flu-like illness.

  • The S&P 500 finished lower by 4.4% on the day while the Dow Jones Industrial Average dipped by another 1190 points, bringing the weekly point losses to more than 3,000.

  • The broad-based commercial Real Estate ETF (VNQ) finished lower by 5.3%, dragged down by sharp declines from the generally-safe-haven net lease and healthcare REIT sectors while hotel REITs were a surprising source of relative strength.

  • There was good news amid the sea of red. Pending Home Sales came in far above expectations, completing the "Perfect Month" for the U.S. housing markets with better-than-expected reports on all of the major housing data releases this month.

Real Estate Daily Recap

The coronavirus-related selling intensified on Thursday as U.S. equity markets dipped into correction territory with the major averages now lower by roughly 10% from recent all-time-highs. The S&P 500 ETF (SPY) finished lower by 4.4% on the day while the Dow Jones Industrial Average (DIA) dipped by another 1190 points, bringing the weekly point losses to more than 3,000 points. The 10-Year Treasury Yield (IEF) declined by 1 basis point to end the day at 1.30%, another historic closing low. The broad-based commercial Real Estate ETF (VNQ) finished lower by 5.3%, dragged down by sharp declines from the generally-safe-haven net lease and healthcare REIT sectors while hotel REITs were a surprising source of relative strength.

The sell-off continued despite generally positive news out of China on virus containment and no additional evidence of a more serious outbreak in the U.S. for the flu-like illness. Per the WSJ, "The number of new coronavirus cases in China dropped dramatically in recent days outside the province at the center of the epidemic." Starbucks (SBUX) announced that it plans to re-open stores in China, citing a decline in new cases in China and "early signs of a recovery in the region.” This news of improving conditions in China, however, was unsurprisingly buried amid a sea of rampant media speculation reminiscent of the Ebola scare of late 2014 that led to a 6% pullback in stocks. For the week, the S&P 500 is now lower by roughly 10.8%, which would be one of the five worst percentage losses for the benchmark index since WWII.

There was good news amid the sea of red. Pending Home Sales came in far above expectations, completing the "Perfect Month" for the U.S. housing markets with better-than-expected reports on all of the major data releases this month including New Home Sales, Existing Home Sales, Pending Home Sales, Building Permits, Housing Starts, and Case-Shiller Home Prices. As discussed in our Real Estate Weekly Review, the continued strength of the domestic housing industry - which helped to power the economy up the "wall of worry" last year - will be asked to shoulder even more of the burden of global economic growth in the early stages of 2020.

Somewhat surprisingly, hotel REITs and mall REITs were among the top-performers on the day, led by Washington Prime Group (WPG), which gained more than 10% despite reporting weaker-than-expected results and slashing its dividend in half. Earlier in the week, fellow lower-productivity mall REIT Pennsylvania REIT (PEI) was slammed by investors it chose not to cut its dividend despite the projected 130% AFFO payout ratio in 2020 based on guidance. Host Hotels (HST) and Ryman Hospitality (RHP) were also among the leaders today after generally positive earnings and commentary from Marriott (MAR) and indications of virus containment in China.

Also somewhat surprising in today's market action was the weakness from the defensively-oriented net lease REIT sector. Industry stalwarts Realty Income (O), Store Capital (STOR), and National Retail (NNN) were all lower by more than 7.5%. As explained in our Net Lease REIT report, equity market valuations can and do have a meaningful impact on the underlying business operations of these companies, which are heavily reliant on secondary equity offerings to fuel external growth. Crown Castle (CCI) was also among the laggards after the cell tower REIT announced that it will restate some financial statements due to accounting for tower installation services, an issue that has been flagged by analysts for several years.

REITs reporting after the close today include American Homes 4 Rent (AMH), Seritage Growth (SRG), and Howard Hughes (HHC). Our Real Estate Earnings Preview compiled the notable earnings that we're watching across the residential and commercial real estate sectors. We'll have additional coverage on iREIT on Alpha as well as our Real Estate Weekly Outlook.

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