Market Commentary

Value-oriented and momentum-oriented investors look to take advantage of different opportunities: value investors look for stocks selling well below normal, while momentum investors look for stocks that have done well recently.  Both opportunities can be found today among sectors of the REIT market.

Nonfarm payrolls rose 209,000 in July, signaling that the economy has good momentum at mid-summer, while office jobs in Gateway Cities have rebounded in recent months.. 

Commercial real estate markets appear to have settled in for the long haul. New supply and the growth of demand are roughly balanced in most property sectors, vacancy rates are stable and rents growing modestly.

Appraisal-based valuations in private real estate markets are being systematically reported at levels that exceed those of reported transactions—in which case there may be more valuation risk in private equity real estate markets than many institutional investors realize.

While valuations are somewhat different across different segments of the REIT industry, there is a “wealth of undervaluation” in REITs today—and investors certainly should be paying closer attention.

Over the first six months of 2017 the broad U.S. stock market had outperformed the REIT market, with the Russell 3000 Index showing total returns of 8.93% compared to just 5.43% for the FTSE NAREIT All REIT Index.  Dig just a little deeper, though, and this turns out not to be a “stocks vs REITs” story at all.

Recently, office properties in many secondary markets have enjoyed greater demand and rising occupancy rates relative to office markets in gateway cities. 

I think it’s very difficult to make any thoughtful (let alone empirically based) case for predicting that the current real estate market cycle is nearing its end.  The evidence simply isn’t there.

Will the gap be closed through underperformance in what may be an overvalued private real estate market, overperformance in what seems very clearly to be an undervalued listed REIT market, or a little of both?

The movement towards more sustainable practices continues with commercial real estate, and REITs are helping lead the charge. 

The $64 million question in commercial real estate today is whether or not the sector is past its peak and headed for a slowdown.