01/27/2020 | by

Lindsay Dutch, REIT Equity Analyst, Bloomberg Intelligence

"Entitlements: The entitlement process appears to be getting more difficult and taking longer in general and across the property spectrum—from building warehouses and self-storage facilities to adding residential, hotels, or offices to existing retail properties. This under-the-radar factor bears watching, as entitlements are key for growth for many REITs. This is especially important in a low cap rate environment, when acquisitions can be expensive.

A more arduous or lengthy entitlement process—which often varies greatly by state and municipality—could govern development pipelines and can therefore make already-entitled projects or sites more valuable. Prologis, for example, said in October that the entitlement process has contributed to an increase in the time to delivery for U.S. warehouses by up to six months. This is significant as such projects could previously be completed within a year.”

David Rodgers, Senior Research Analyst – Real Estate, Baird

"Labor is an under-appreciated disruptor for real estate and REITs. The increasingly narrow market for construction labor in the U.S. should drive property values and REIT stock prices higher in the year ahead.

With the unemployment rate for those with less than a bachelor’s degree now below the 5% level recorded in December 2007 and high school/associate degree earners tracking below 4%, we expect the availability will continue to decline. At the same time, the cost of labor—particularly construction labor—should add to construction costs across virtually all asset classes.

While this could delay some project starts in the near term, we expect, more importantly, that this factor should support multiple expansion for REITs in 2020 as replacement costs outpace rent growth. Existing, higher-quality assets and REITs should benefit from a more active investment sales market at increasing pricing. M&A could also become more prevalent if discounts widen to a rising cost of replacement.”

Jim Sullivan, Managing Director and REIT Analyst, BTIG

"E-commerce related REITs, like the industrial and data center sectors have outperformed for several quarters as their growth rates are secular rather than cyclical and in a period of low growth generally, the performance and returns have been exceptional. Election years can pose increased risks in the form of heightened regulatory oversight and potential taxation. E-commerce as a sector of the economy generally pays less tax as a percentage of revenues, especially at the sales tax and real estate property tax levels.

We could see initiatives to both regulate and tax e-commerce in a number of ways. Politically, such initiatives can be promoted as ‘leveling the playing field.’ If such efforts do unfold in 2020, they could have a negative effect on valuations for both the industrial and data center sectors, and, possibly, a positive effect on the mall sector where valuations are well below long-term averages.”