Groundbreaking News: Real Estate Has A Few Innings Left

Jun. 06, 2019 7:00 AM ETCCI, CONE, SVC, O, SMTA, SRC, STOR34 Comments34 Likes


  • Homer Hoyt was studying the Chicago-specific real estate market, and he noticed how it tended to follow a pattern of peaks and valleys.
  • Hoyt’s model (an 18-year real estate business cycle) validates the point that the brick and mortar asset class has a high degree of predictability.
  • By paying close attention to property-sector fundamentals, investors can stay best informed. And that’s of course the secret to “sleeping well at night.”.
  • This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Start your free trial today »

Have you ever heard of Homer Hoyt?

Probably not, and that’s OK. But prepare to get an education on who he is and why he matters anyway.

Born at the very end of the 19th Century, he died three and a half decades ago in 1984. Yet his work is hardly outdated today as we look to wrap up the second decade of this new millennium. His thinking about economics in general and real estate in particular were, dare I say, groundbreaking.

That pun aside, here’s how The Hoyt Group, which he helped create in 1984, describes him:

Homer Hoyt pioneered academic and practitioner real estate market analysis in the mid-20th Century. Academics know him primarily for his sector theory of urban land development and for his classic 100 Years of Land Values in Chicago. Practitioners also know him for advances in applied analytics that came about from his consulting and appraisal services, including his use of economic base calculations as input measurements to estimate current and projected demand for commercial and residential real estate.”

If your head is hurting a bit from all that jargon, don’t quit quite yet. I promise you it’s going to get good. First though, a little more insider lingo from the afore-cited source:

Homer Hoyt innovated procedures for estimation of highest and best use of a site (a site looking for use), and for analyzing location criteria for a real estate activity (a use looking for a site). A third legacy of Homer Hoyt is his contributions to the development of institutions important to land economics and real estate, including the Federal Housing Administration, and his endowment of the Homer Hoyt Institute.”

And, finally, what the website calls his “most enduring legacy,” was his belief that “real estate market analysis be a balance of rigor and relevance.”

Quite the interesting terms. Wouldn’t you say?

Photo Source

Where Rigor and Relevance Can Get You defines “rigor” in part as “scrupulous or inflexible accuracy or adherence.” And it defines relevance as “the condition of being relevant, or connected with the matter at hand.”

This seems like a valuable approach to something as potentially profitable – or potentially regrettable – as real estate purchases. Here’s what can come out of it, both in the mid and much more recent pasts…

In the 1930s, Hoyt was studying the Chicago-specific real estate market. As he did, he noticed how it tended to follow a pattern of peaks and valleys when it came to land value and construction efforts.

That much shouldn’t be surprising considering how so much of life is cyclical, from the four seasons we experience… to the consistent journey from birth to death… to societal trends. With that said, this particular pattern was a little less expected.

While evaluating an almost 100-year history of Chicago, Hoyt discovered that its real estate operations followed a near-perfect 18-year cycle. It did, admittedly, fall apart for a significant 48-year stretch after that. And it hasn’t fully come back since 1973, showing a six-year cycle, a 10-year-cycle, and a 17-year-cycle instead.

So, as Colin Brechbill, author of the NuWire Investor article “The Real Estate Cycle: Where Are We Now?” noted:

If you were expecting a perfect cycle that allowed you to precisely time your investment and make a ton of money with no risk – sorry to disappoint. Perfect business cycles just (don’t) exist… The important part isn’t necessarily the time frame though. The important part is that you understand the leading indicators signaling when the cycle is turning.”

And that’s precisely what economist Fred E. Foldvary did just last decade, correctly predicting the real estate crash of 2008 as a result.

Any model that can do that is OK with me.

Photo Source

Old Topic, New Approach

If any of this is sounding familiar, you’ve got me. I did mention Homer Hoyt, Colin Brechbill, and this famed real estate cycle back in April in my article, “ Two Words to Help You Sleep Well at Night: Real Estate.”

That piece was designed to kick off my “Lessons Learned” series, with each new piece referring back to something specific on how to go about investing in this hallowed commodity – and how not to… all based off my own experiences in life and the realizations that came out of them.

Sometimes painfully.

The write-up didn’t recommend any particular stocks in and of itself. It only pointed out how real estate could be looking strong for a while to come.

This time around though, I’m dealing with the data from a slightly different approach.

You see, real estate investors should recognize that real estate is a cyclical business. While most stock prices follow a standard business cycle, which traces changes in general economic activity as measured by GDP, income, employment, industrial production, sales, and the like…

“Real estate cycles” are over three times longer due primarily to the difficulty of construction.

As Homer Hoyt recognized, typically, it takes four years to complete a real estate project from site plan to rent check. Alternatively, other businesses can adjust their production schedules in a matter of weeks or months.

The chart below illustrates the real estate cycle’s four-broad phases:

Hoyt’s 18-year model validates the idea that the brick and mortar asset class has a high degree of predictability… with just two exceptions: 1) WWII and 2) the mid-cycle peak created by the Fed doubling rates in 1979.

Other than those, believe it or not, it’s maintained the very level of predictability that Hoyt first observed.

I’m Not a Market Timer

As many of you know, I’m not a market timer when it comes to investing. But I do believe it’s important (arguably critical) to be cognizant of supply and demand fundamentals.

This simply means that I trust the Hoyt model – recognizing that, when I buy into a REIT, I’m also purchasing the underlying real estate. So I pay very close attention to the property sector, its subsectors, and their supply and demand characteristics.

I might also add that one of the reasons why I research and invest in commercial mortgage REITs is because I also can apply this same knowledge to gain an edge on that market.

With that in mind… let me tell you about a few of my favorite property sectors that are ready for extra innings…

Cell Tower REITS and Data Center REITs

Cell Towers: Cell tower REITs own roughly 80% of the 100,000 macro cell towers in the United States. That’s by far the highest concentration of REIT ownership of any real estate sector.

The relative scarcity of cell towers – combined with their absolute necessity for cell networks – has given these REITs substantial pricing power.

In this sector, we like Crown Castle ( CCI) in particular. Its higher payout ratio and dividend yield, which is at 3.4% today, appeal to us. We like its upward mobility as well, with 7% to 9% annual growth forecasted over the next three years.

Shares are rich today, trading at 23.4x vs. a five-year average of 20x. But we see no sign of a slowdown and only recommend waiting on a pullback before getting in.

Data Centers: Data center REITs own and manage facilities that safely store data. They offer a range of products and services to help keep servers and data safe. This includes uninterruptible power supplies, air-cooled chillers, and physical security. They are driven by a steady and growing demand accelerated by artificial intelligence and cell phone usage.

In the data center sector, we like CyrusOne ( CONE) due to its high development yields – which are in the mid-double-digits – and more recent global expansion. Although it opted to delay its dividend bump in Q1-19, we expect to see that change shortly.

On our Marketplace service, we said that “CyrusOne doesn’t see any competitors in Europe. It’s focused on interconnection and on high-end space (like Prologis in Industrial).” Similar to Crown Castle, it does have a lower yield of 3.2%. However, it more than makes up for that in growth prospects of 11% over the next two years.

We’re maintaining a buy, with shares still currently trading slightly below historical averages.

Net Lease REITs

Net Lease: Net lease REITs generally rent out properties with long-term leases of 10 to 25 years. And this is to high credit-quality tenants, usually in the retail and restaurant spaces. Operating under triple-net lease structures, its tenants pay all expenses related to property management, meaning property taxes, insurance, and maintenance.

I’m sure you’re asking why I’m including boring net lease REITs in the same list as cell towers and data centers.

But, importantly, they’ve become the modern-day aggregators of corporate real estate. By utilizing the sale/leaseback format, net lease REITs have been able to consolidate large portfolios within this highly fragmented property sector.

Given the size of the market, we believe they can continue growing their earnings at 4% to 6% per year.

We recently bumped Spirit Realty (SRC) from a Hold to a Buy on the heels of the Spirit Master Trust (SMTA) news that the company was being acquired by Hospitality Property Trust (HPT) for $2.4 billion. The news is significant for Spirit, since the transaction – which closes in Q3-19 – is effectively the last significant step in its three-year transformation process.

By removing the overhang, we expect Spirit’s shares to see multiple expansion. Moreover, we expect that to happen complete with a competitive cost of capital and runway for growth.

Also, we think that bigger fish like Realty Income (O) and Store Capital (STOR) will take notice of Spirit… perhaps leading to a wave of consolidation. For instance, Vereit (VER) is another takeover target. or perhaps a Sprit and Vereit merger could be in the making.

Regardless, Sprit’s dividend yield is 5.7%. And Marketplace readers can read the full research report here.

Once we finish the cap rate series (industrials are up next), we plan to commence a new one… a property-by-property supply and demand series. Its goal is to analyze each category and corresponding life cycle as it relates to the next recession.

By paying close attention to property-sector fundamentals, we believe that investors can be best informed. And that’s of course the secret to “sleeping well at night.”

A Final Question

In closing, I’ll ask you this…

Overall, what part of the broader commercial real estate cycle do you think we’re in?

  • Excitement (first inning)
  • Thrill (third inning)
  • Euphoria (sixth inning)
  • Anxiety (seventh inning)
  • Denial (eighth inning)
  • Fear (ninth inning)
  • Desperation (overtime/10th inning)
  • Panic (11th inning)
  • Capitulation (clubhouse)?

I look forward to seeing your comments!


Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free, and its only purposes are to assist with research while providing a forum for second-level thinking.

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This article was written by

Brad Thomas profile picture
Author of iREIT on Alpha
The #1 Service For Safe and Reliable REIT Income

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.

Disclosure: I am/we are long CCI, CONE, O, STOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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