- U.S. equity markets extended their reopening rally this week amid signs of an emerging "V-shaped" post-pandemic economic recovery juxtaposed with scenes of violence in the streets of major U.S. cities.
- The U.S. economy unexpectedly added 2.5 million jobs in May - the single-largest month of job growth ever - following two months of devastating job losses during the coronavirus-related shutdowns.
- Closing 42% above its lows in late March, the S&P 500 added another 4.9% this week while the Nasdaq climbed to fresh record-highs, a seemingly unfathomably feat back in March.
- Real estate equities have been among the biggest winners of the reopening rebound. Equity REIT ETFs gained another 10.9% this week, led by a 50% surge from mall REITs.
- The U.S. housing sector has foretold the emerging consumer-led rebound for several weeks. High-frequency data continues to indicate that the housing industry will be an early leader of the post-pandemic recovery.
- This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »
Real Estate Weekly Outlook
U.S. equity markets extended their reopening rally this week amid signs that the post-pandemic economic rebound has formed the early contours of a V-shaped recovery following data that showed a stunning rebound in employment growth in May following a dismal March and April. The seemingly relentless equity market rally that pushed several major indexes to new record highs was juxtaposed with scenes of violence and unrest in the streets of many major U.S. cities and the receding coronavirus pandemic which was relegated out of the headlines for the first time in months as states and countries around the world continue to accelerate economic reopenings.
Closing more than 42% above its lows in late March, the S&P 500 ETF (SPY) added another 4.9% this week and is amazingly lower by just 1% for the year. The Nasdaq (QQQ), meanwhile, climbed to a new record high, a feat that was seemingly unfathomable amid the market chaos in late March. The bulk of the recent gains, however, have been driven by a rebound in the most-beaten-down segments of the equity market that were ravaged by the economic shutdowns. Real estate equities have been among the biggest winners of the sooner-than-anticipated rebound as the broad-based Equity REIT ETFs (VNQ) (SCHH) surged another 10.9% this week following last week's 7.0% gain, led by double-digit percentage gains from 11 of the 18 property sectors.
Indications of a potential V-shaped recovery have been brewing for several weeks now in the U.S. housing sector, as high-frequency housing data has been foretelling a stronger-than-expected consumer-led rebound in May. The Hoya Capital Housing Index jumped another 11.3% this week, led by a continuation of the rally in homebuilders and strength among residential REITs that reported stronger-than-expected rent collection metrics during the annual REITweek conference. All 11 GICS equity sectors ended the week in the positive territory, led by double-digit percentage gains from the economically-sensitive Energy (XLE), Financials (XLF), Industrials (XLI) sectors while Small-Cap (SLY) and Mid-Cap (MDY) stocks extended their furious rebound, surging by 12.2% and 8.4%, respectively.
Real Estate Economic Data
Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.
This week's gains were bolstered by a highly encouraging slate of employment data, capped off by the stunning BLS nonfarm payrolls report on Friday. The U.S. economy unexpectedly added 2.5 million jobs in May - the single-largest month of job growth ever - following two months of devastating job losses during the coronavirus shutdowns. Economists were expecting up to 8 million additional job losses in May, and while we've been highlighting for several weeks that higher-frequency data - specifically continuing jobless claims, commentary from corporations, and mobility data - has indicated that millions of temporarily-unemployed Americans have indeed returned to work over the last several weeks, we had not expected job growth to turn positive until the June jobs report. Among the 17.8 million Americans currently unemployed, 84% of these individuals are still classified as on "temporary layoff" suggesting that the rebound in job growth could be even more significant in June.
While some pundits remained highly skeptical of the recent jaw-dropping rally citing ugly backward-looking metrics, we've discussed how obvious signs of strength in high-frequency housing data should not be overlooked considering the absolute importance of the "housing economy" on the broader U.S. economy. The Mortgage Bankers Association reported this week that mortgage applications to purchase a home - a leading indicator of existing home sales - rose for the 7th straight week and are now 18% higher from the same week last year compared to the 35% decline in early April. This follows data last month from Redfin (RDFN) which showed that homebuying demand is now 16.5% above pre-coronavirus levels while Zillow (Z) reported a 50% surge in pending home sales over the last month and that activity on their site is back to pre-pandemic levels.
As we pointed out last week, helping to stabilize the U.S. economy - and laying the seeds to the rebound in housing market activity - has been the unprecedented level of fiscal stimulus sent directly to millions of households through the combination of direct checks and unemployment benefits that grant many Americans more total monthly income than their prior salaries. We continue to emphasize that it is difficult to envision the "depression-like" economic environment forecasted by some analysts without first seeing substantial instability in the housing market. While very early in the economic recovery, we're so far observing quite the opposite as the combination of favorable millennial-led demographics, record-low mortgage rates, and a substantial undersupply of housing units after a decade of historically low levels of new construction continue to be relentless tailwinds.
Commercial Real Estate
The double-digit percentage gain from the equity REIT sector this week came during the industry's annual REITweek conference, held "virtually" this year, where we heard interim updates on May rent collection metrics and commentary regarding "on-the-ground" fundamental trends from several dozen REITs and expect more reports to trickle out in the weeks ahead. These updates have so far been quite positive with most REITs reporting similar or stronger collection rates in May as in April while bigger-picture commentary has generally been quite optimistic. "Essential" property sectors including housing, industrial, and technology REITs, along with self-storage and office REITs, all reported collection of more than 90% of rents in April and May.
Capturing the headlines this week, however, was the incredible 50% surge from the beaten-down mall REIT sector, which was the single-largest weekly percentage gain for any major REIT property sector on record. Simon Property (SPG) jumped more than 54% this week, but somehow still didn't manage to crack the top-10 list of strongest performers as several REITs including Cedar Realty (CDR), Seritage Growth (SRG), and Hersha Hospitality (HT) nearly doubled this week. The rebound came after extremely encouraging reports on rebounding demand from mall-based tenants including American Eagle (AEO), Abercrombie & Fitch (ANF), and Cheesecake Factory (CAKE), which reported that it has already recaptured 75% of sales. Meanwhile, data from Visa (V) showed that payment volume was lower by only 5% in May from last year compared to the 18% dip in April.
The sharp rebound in hotel and casino REITs was driven by data from STR showing that hotel occupancy climbed for the seventh-straight week while the Global Airline ETF (JETS) surged more than 30% on news that major U.S. carriers plan to add flights in response to strengthening travel demand. Host Hotels (HST) noted that it believes that occupancy declines caused by the COVID-19 pandemic hit bottom in April, noting that demand has started to pick up in some markets. VICI Properties (VICI) announced that it collected 100% of rent for the month of May and anticipates collecting all rent due for the month of June. While 2020 may have more craziness still to come including a presidential election in November, it appears that this time was indeed "different" than the prior recession for the commercial real estate sector as equity REITs have rebounded nearly 50% from their lows in March.
Last week, we published Dividend Cuts And Overdue Rent: REIT Earnings Recap where we discussed fundamental trends observed in first-quarter earnings reports. 2020 was poised to be a solid year of growth for REITs prior to the pandemic, but even with a faster-than-expected reopening, fundamental metrics including same-store NOI growth and FFO growth are likely to be the weakest since at least 2009, but several property sectors should be relatively immune from the downturn. Economic shutdowns ravaged the economically-sensitive property sectors and punished highly-levered REITs, but so far we haven't seen any true "fireworks" thus far. We have tracked 52 equity REITs - primarily retail and lodging REITs - out of our universe of 165 equity REITs that have now announced a cut or suspension of their common dividends.
Mortgage REITs & REIT Preferreds
There have been plenty of fireworks this year in the Mortgage REIT (REM) sector, however, which remains lower by roughly 40% this year despite an 85% recovery from the dreadful lows in early April. Residential mREITs surged another 18.3% this week while commercial mREITs jumped 20.7% In our Earnings Recap published last week, we noted that Residential mREITs were the hardest-hit real estate sector during the depths of the pandemic, but have seen conditions stabilize considerably in recent weeks amid signs of stabilization in the mortgage markets. Commercial mREITs weren't facing the same "existential crisis" as their residential mREIT peers, but the sector's heavy exposure to the hotel, office, and retail sectors has dragged on performance until the rebound in these sectors over the past several weeks.
Encouragingly, the number of Americans seeking forbearance on their mortgages dropped for the first time since the start of the pandemic this week according to data from Black Knight, which showed that 4.73 million loans are currently in forbearance, down from 4.76 million last week, representing an 8.9% share of all mortgages. The total number of homeowners seeking forbearance appears to have topped-out well below 5 million, which represents 9% of all active mortgages, which would be well below the expectations of some pundits who expected up to 25% of mortgages to enter forbearance. Additionally, a recent survey from LendingTree found that the majority of borrowers chose to enter forbearance not out of necessity, but because it was offered and available without any apparent penalty under the CARES Act.
The REIT Preferred ETF (PFFR) ended the week higher by 4.8%, driven by strong gains from the preferred issues from lower-productive mall REITs including CBL & Associates (CBL), Pennsylvania REIT (PEI), and Washington Prime (WPG) along with several hotel REITs including Sotherly Hotels (SOHO) and Ashford Hospitality (AHT). Among REITs that offer preferred shares, the performance of these securities has been an average of 13.3% higher in 2020 than their 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, we published REIT Preferreds: Higher-Yield Without Excess Risk where we introduced our all-new REIT Preferred and Bond Tracker and discussed the investment characteristics of these "hybrid" securities. We pointed out that total returns of REIT preferreds have lagged the REIT common stock index, but REIT preferreds have exhibited significantly lower volatility, translated into risk-return ratios nearly on par with - but still slightly inferior to - REIT common shares. A somewhat esoteric segment of the REIT investment landscape - but an under-the-radar favorite among yield-focused REIT investors - the usage of preferred equity within a REIT's capital stack has waxed and waned over time depending on prevailing capital market conditions, but currently about a quarter of equity REITs and the majority of mortgage REITs currently have active preferred or "baby-bond" securities.
2020 Performance Check-Up
REITs are now lower by roughly 11.4% this year compared with the 0.8% decline on the S&P 500 and 4.8% decline on the Dow Jones Industrial Average. Consistent with the trends displayed within the REIT sector, mid-cap and small-cap stocks continue to underperform their larger-cap, although this underperformance gap has closed significantly in recent weeks. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as industrial REITs joined data centers and cell tower REITs as the lone real estate sectors in positive territory for the year, residential REITs have also delivered notable outperformance. At 0.90%, the 10-Year Treasury Yield (IEF) has retreated by 102 basis points since the start of the year and is roughly 235 basis points below recent peak levels of 3.25% in late 2018.
Next Week's Economic Calendar
It'll be a relatively busy week of economic data, highlighted by CPI inflation data on Wednesday and PPI inflation data on Thursday. We'll hear from the Federal Reserve on Wednesday, where we'll be listening for any change in tone or rhetoric from Fed Chair Powell regarding the unprecedented levels of monetary support and emergency actions over the past several months. Continuing jobless claims will also continue to be our focus for indications that temporarily-unemployed Americans are returning to work.
If you enjoyed this report, be sure to "Follow" our page to stay up to date on the latest developments in the housing and commercial real estate sectors. For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Healthcare, Industrial, Data Center, Malls, Net Lease, Shopping Centers, Hotels, Billboards, Office, Storage, Timber, Prisons, Real Estate Crowdfunding, and REIT Preferreds.
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This article was written by
Alex Pettee is President and Director of Research and ETFs at Hoya Capital. Hoya manages institutional and individual portfolios of publicly traded real estate securities.
Alex leads the investing group Hoya Capital Income Builder. The service features a team of analysts focusing on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Learn More.
Analyst’s Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. 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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