• Alex Pettee, CFA

Zoom Boom | Builders Rally | Office Under Pressure

Updated: Sep 10, 2020

Daily Recap

  • U.S. equity markets finished higher Tuesday as the flow of better-than-expected economic data continued with solid manufacturing data ahead of three days of closely-watched employment data.

  • Following declines of 0.2% yesterday, the S&P 500 finished higher by 0.8% today while the Dow Jones Industrial Average gained 216 points following yesterday's 224 point-decline.

  • Coming off declines of 1.0% yesterday, the Equity REIT ETF (VNQ) finished fractionally higher today with 11 of 18 property sectors in positive territory. Mortgage REITs gained 0.7%.

  • Work-from-home technology company Zoom (ZM) surged more than 40% today after reporting earnings results. We discuss how the increased adoption of remote working will impact commercial real estate.

  • Perhaps some good news for commercial real estate landlords: nonresidential construction spending has pulled back sharply in 2020 since the start of the pandemic as developers. Residential spending, however, has bounced back sharply this year.

U.S. equity markets finished higher Tuesday as the flow of better-than-expected economic data continued with solid manufacturing data ahead of three days of closely-watched employment data beginning with ADP data tomorrow morning. Following declines of 0.2% yesterday, the S&P 500 ETF (SPY) finished higher by 0.8% today while the Dow Jones Industrial Average (DJI) gained 216 points following yesterday's 224 point-decline. The Nasdaq 100 ETF (QQQ) jumped another 1.4%. Coming off declines of 1.0% yesterday, the Equity REIT ETF (VNQ) finished fractionally higher today with 11 of 18 property sectors in positive territory. The Mortgage REIT ETF (REM) finished higher by 0.7% today after declining by 1.5% on Monday. 

Work-from-home technology company Zoom (ZM) surged more than 40% today after reporting earnings results. We analyzed the increased adoption of remote work and the implications for the commercial real estate sector today in Office REITs: Work-From-Home Reckoning. 8 of the 11 GICS equity sectors finished higher today, led by the Materials (XLB), Technology (XLK), and Consumer Discretionary (XLY) sectors. Homebuilders and the broader Hoya Capital Housing Index were among the leaders today as recent economic data and commentary from homebuilding industry executives suggest that housing can continue to lead the post-pandemic recovery. 

Perhaps some good news for commercial real estate landlords: nonresidential construction spending has pulled back sharply in 2020 since the start of the pandemic as developers take a "wait-and-see" approach to new projects amid immense uncertainty over future demand for office, retail, and lodging space. The Commerce Department said on Tuesday that total construction spending decreased 0.1% from last July, pressured by a 4.3% annualized year-over-year decline in private nonresidential spending. Residential spending has bounced back over the last three months, however, consistent with data showing clear signs of a V-shaped recovery in the U.S. homebuilding sector.

Commercial Equity REITs

As discussed above, today we published Office REITs: Work-From-Home Reckoning. Did coronavirus kill the office? Despite reporting near-perfect rent collection throughout the pandemic, office REITs continue to be under pressure as the “Work From Home” paradigm threatens the long-term outlook. Survey data and commentary from corporations indicate that the WFH paradigm is here to stay long after the pandemic subsides. Technology has accelerated the pre-existing trends of increased workplace efficiency.

While many desks still sit empty, tenants continue to pay their rent, for now. As a result, only 5 of the 26 office REITs have reduced their dividend this year. As "WFH" days become the industry standard, the office sector's loss is the housing market's gain. Residential REITs and homebuilders have reported robust demand for extra space to accommodate home offices. Nuance is required, however, as suburban and Sunbelt office assets are likely to see robust demand over the next decade, mimicking similar trends as those seen after the 9/11 terrorist attacks amid a broader "suburban revival."

Mortgage REITs

Residential mREITs finished higher by 0.1% today but remain lower by 2.3% this week. Commercial mREITs finished flat today but remain lower by 1.7% this week. Last week, the FHFA announced that it will extend the temporary halt on foreclosures and evictions on GSE-backed mortgage loans until the end of the year. The moratorium, which applies to all properties with single-family mortgages backed by Fannie or Freddie, had been set to expire at the end of August. Earlier this month, we published our Mortgage REIT Earnings Recap where we discussed some of the broader trends in the mREIT industry.

REIT Preferreds & Bonds

As tracked in our all-new REIT Preferred Stock & Bond Tracker available to iREIT on Alpha subscribers, REIT Preferred stocks finished higher by 0.1% today, on average, but outperformed their respective common stock issues by an average of 0.3%. Among REITs that offer preferred shares, the performance of these securities has been an average of 19.5% higher in 2020 than their respective common shares. Preferred stocks generally offer more downside protection, but in exchange, these securities offer relatively limited upside potential outside of the limited number of “participating” preferred offerings that can be converted into common shares.

This Week's Economic Calendar 

Employment data highlights this week's busy economic calendar, headlined by ADP data on Wednesday, jobless claims on Thursday, and the BLS nonfarm payrolls report on Friday. Economists are looking for employment gains of roughly 1.4 million in August following July's better-than-expected gain of 1.8 million while the headline unemployment rate is expected to pull back below 10%. We'll also saw Construction Spending data today and a flurry of PMI data throughout the week.


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