Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA

Rates Down, REITs Up [Daily Recap]

  • U.S. equity markets stumbled into the weekend as investors piled into safe-haven assets amid continuing concerns over the economic fallout of the ongoing coronavirus outbreak.

  • The S&P 500 finished the day lower by 1.2% while the Dow Jones Industrial Average retreated by 228 points. The 30-Year Treasury Yield, meanwhile, plunged to record lows.

  • Lower yields were good news again for the defensive, yield-sensitive sectors. The broad-based commercial Real Estate ETF (VNQ) gained 0.3% on the day and was the top-performing sector for the week.

  • Existing home sales data this morning topped estimates as low mortgage rates and solid demographic-driven demand continue to provide a favorable tailwind for the residential real estate industry.

  • Stay tuned for full coverage of this week's economic data in our Real Estate Weekly Outlook report published tomorrow morning.

Real Estate Daily Recap

U.S. equity markets stumbled into the weekend as investors piled into safe-haven assets amid continuing concerns over the economic fallout of the ongoing coronavirus outbreak. The S&P 500 ETF (SPY) erased it's weekly gains, finishing the day lower by 1.2% while the Dow Jones Industrial Average (DIA) retreated by 228 points. The story of the day was the bid for Treasury bonds, sending the 10-Year Treasury Yield (IEF) lower by 5 basis points to close the day at 1.47% while the 30-year Treasury yield plunged to record lows. Lower yields were good news again for the domestic and yield-oriented sectors. The broad-based commercial Real Estate ETF (VNQ) gained 0.3% on the day and was the top-performing equity sector for the week.

Existing home sales data this morning topped estimates as low mortgage rates and solid demographic-driven demand continue to provide a favorable tailwind for the residential real estate industry. Existing sales - which account for roughly 90% of total home sales - are now higher by 9.6% from the same period last year. The Hoya Capital Housing Index, the benchmark that tracks the performance of the US Housing Industry, retreated from yesterday's record highs, but was led again today by Zillow (Z), which surged more than 25% this week after reporting surprisingly strong Q4 earnings with revenues rising 106% for the year, powered by a rapid expansion in their Zillow Offers business and growth in the Premier Agent business.

Among equity sector ETFs, the Commerical Real Estate (VNQ), Consumer Staples (XLP), and Healthcare (XLV) sectors led the way on the day while the Technology (XLK), Consumer Discretionary (XLY), and Communications (XLC) sectors lagged. For the year, REITs are now higher by 7.3% compared to the 3.6% gains from the S&P 500. As discussed in our recent 2019 Real Estate Recap, REITs delivered their second-best year of the decade in 2019, delivering a total return of nearly 29% compared to the 31% returns from the S&P 500. We'll have a full analysis of this week's price action in our Real Estate Weekly Outlook report published tomorrow morning.

On the commercial REIT side, net lease REIT WP Carey (WPC) jumped nearly 4% after reporting very strong results this morning, forecasting FFO per share growth well above consensus estimates. Self-storage REIT CubeSmart (CUBE) also delivered a strong day after decent results yesterday afternoon following a weaker-than-expected report from self-storage peer ExtraSpace (EXR) earlier this week that dragged on the sector. Data center REIT CyrusOne (CONE) rallied added to its post-earnings rally after the company announced the departure of CEO Gary Wojtaszek yesterday morning, which was viewed as a sign that the company is more likely to move forward on a long-anticipated sale of the company.

Our comments on potential M&A in the mall sector were featured today in National Real Estate Investor. We noted, “Specific to mall REITs, desperate times call for desperate measures, and I think anything and everything is potentially on the table for these struggling REITs, which have underperformed the broader REIT average for four straight years." We're now more than three-fourths of the way through earnings season. Major reports next week in the REIT space include American Tower (AMT), Public Storage (PSA), Vereit (VER), and we'll also see results from home improvement retailers Home Depot (HD) and Lowe's (LOW). We recently published our 4Q19 Real Estate Earnings Preview: 5 Trends To Watch This Earnings Season. We'll have additional coverage on iREIT on Alpha as well as our Real Estate Weekly Outlook.

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