REIT Executives See Growth Moderating in 2017

REIT executives in the residential, retail and lodging sectors say new supply and changes in consumer habits are likely to result in more moderate growth in 2017 compared with recent years.

C-suite executives from AvalonBay Communities Inc. (NYSE: AVB), Federal Realty Investment Trust (NYSE: FTR) and Host Hotels & Resorts Inc. (NYSE: HST) offered their thoughts on the direction of their companies’ sectors in an April 19 Real Estate Lenders Association panel held in Washington, D.C. The roundtable was moderated by Calvin Schnure, NAREIT senior vice president for research and economic analysis.

Supply and Demand Returning to Balance in Apartments

Matt Birenbaum, CIO of AvalonBay, described the past decade as a “phenomenal” period for the apartment industry. Supply is now catching up with demand, he said, especially in urban markets.

Birenbaum said that after three to four years of outsized rent growth in the “high-single digits,” AvalonBay is projecting the rate will decline to closer to mid-single digits.

“Tipping Point” in Retail

In retail real estate, Federal Realty CFO and Treasurer Dan Guglielmone said it is likely that 2016 and 2017 will be regarded in years to come as a “tipping point” for the retail industry.

However, Guglielmone expects that Federal Realty’s portfolio of mixed-use developments in dense, walkable urban environments will continue to be attractive as shopping patterns evolve.

Federal Realty typically posts growth in funds from operations (FFO) of around 7 percent, Guglielmone said, but that will dip to the range of 3 percent to 5 percent in 2017. The company’s FFO growth should return to a range of about 6 percent to 7 percent by 2019 or 2020, according to Guglielmone.

Business Traveler Not Back to Full Strength

Meanwhile, Jay Johnson, senior vice president and treasurer of Host Hotels, commented that business travel has not returned to “full strength” since the end of the financial crisis. Although Host is back to peak occupancy levels, that hasn’t translated into higher rates, he noted.

Johnson highlighted the challenges faced by the New York lodging market from new supply. While Host has experienced negative growth in New York for the last 18 months, the company remains positive for the city on a long-term basis. Expectations are that some hotel supply will undergo a conversion to residential use, he added.

For 2017, Host is forecasting that revenue per available room (RevPAR) growth could be up to 2 percent. In 2016, RevPAR growth was 2.7 percent.

Potential for Rising Rates

Turning to the potential impact of additional interest rate increases, the REIT executives were quick to point out that rates still remain at historically attractive levels.

Johnson observed that rising interest rates should be beneficial for the lodging business because they will serve as proof of increased economic activity. “Rising interest rates won’t impact [Host Hotels’] capital structure,” he said.

Birenbaum added that at some point, rising interest rates will impact asset values. That could trigger a buying opportunity for AvalonBay, he said.

“In some of our markets, asset values are well-above long-term trends,” he noted.