Real Estate Earnings Forecasts
Since February 2020, Public real estate earnings forecasts have decreased by about the same amount as the rest of the public markets(i.e. S&P500)—but REITs have fallen far more in value than the rest of the market.
EPS Forecasts: Since February, REIT earnings forecasts have been revised down by 19% for CY20 and down 14% for CY22, compared to downward revisions for the S&P 500 of 24% and10% for the same periods.¹
Total Return: Despite similar earnings revisions, REITs are down 20% over this period, while the S&P 500 is approximately flat.²
Impact of COVID-19 by Property Type
Real estate has greater exposure to COVID-19 than many sectors, so it’s not surprising to see relative risk premiums increase. But it’s important to remember that real estate is not a homogenous sector—the impact of coronavirus varies significantly by property type. COVID-19 winners include data centers, infrastructure REITs (i.e. cell towers), and industrial. Hotels, retail, and offices are among the biggest COVID-19 losers.
So far, we’ve focused on public REIT performance during the pandemic, but listed real estate only represents 14.72% of the US commercial real estate market.
With the exception of industrial, private real estate, which makes up the vast majority of the US CRE market, has significantly outperformed listed real estate in 2020. For example, office values are down 8.2% in the private market, yet listed office REITs currently trade at a 25.6% discount to their pre-COVID-19 values.
Examples of private market transactions closed during the pandemic include:
- September 2020: Facebook paid $367.6 million to acquire a 400,000 square foot campus in Bellevue, Washington.6
- September 2020: Mack-Cali (CLI) sold a 1.5 million square foot portfolio of 10 suburban New Jersey offices for $160 million, which is rumored to be a c. 5% discount to pre-COVID pricing.
- July 2020: Transamerica Pyramid, which was the tallest building in San Francisco until 20187, traded for approximately $700 million.8
- June 2020: Independence Blue Cross bought its headquarters at 1901 Market Street in Philadelphia for $360 million—a premium to the $340 million to the anticipated valuation when the building was brought to market pre-pandemic.9
- April 2020: Fidelity Investments purchased 245 Summer Street in Boston for $728.5 million. Fidelity previously owned this building before selling it to Benderson in 2004 for $314.8 million.10
- March 2020: Amazon acquired 424 Fifth Avenue, New York for $1.1 billion, which will house more than 2,000 employees.11
US listed REIT rent collections were negatively impacted by COVID-19, but they have been steadily improving since April. Rent collections are just one factor that impacts valuations, but it’s interesting to note that private market apartment values have fallen by 5.7% (see table above), approximately the same amount as apartment REIT rent collections (see table below). The same is generally true for office and retail. 12
One factor contributing to the difference between public and private market real estate valuations could be if public market investors are more likely to be exposed to news such as the following announcement from Facebook…
“Based on guidance from health and government experts, as well as decisions drawn from our internal discussions about these matters, we are allowing employees to continue voluntarily working from home until July 2021”.13
…than they are to industry-specific news, such as Facebook’s September 2020 acquisition of the 400,000 square foot office campus in Bellevue mentioned above, or that Facebook signed a new, 730,000 square foot lease in New York City on August 3rd, 2020, which will allow them to move another 8,500 workers to the city.14
US Treasury yields have fallen c.100bps in 2020 YTD, making real estate an increasingly compelling option for investors who seek dividend income.15
¹Source: Green Street: “Tug of War”, 29 September 2020.
²Sources: Green Street: “Tug of War”, 29 September 2020. Bloomberg.
³Source: NAREIT, https://www.reit.com/data-research/reit-indexes/historical-reit-returns/performanceproperty-sector-subsector. As of 31 August 2020.
4Source: EPRA, https://prodapp.epra.com/media/EPRA_Total_Markets_Table_-_Q4-2019_1580381101760.pdf. As of 31 December 2019.
5Sources: Green Street & NAREIT. As of 31 August 2020.
8Source: Green Street.
9Source: Green Street.
10Source: Green Street.
12Source: NAREIT, https://www.reit.com/data-research/research/nareit-research/reit-industry-august-2020-rent-collections.