“Lots of Reasons” for Optimism About REITs in 2017

In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, offered his opinions on the major trends facing the U.S. economy and real estate industry at the start of 2017.

Schnure dismissed worries about an economic slowdown as “overblown.”

“Economic expansions don’t die of old age. They end when either the economy overheats or gets overbuilt,” he said. Signs of both are nonexistent in the current economy, according to Schnure. He did note that construction activity is growing for most real estate sectors, however.

Looking at potential policy initiatives from President-elect Donald Trump’s new administration, Schnure said infrastructure spending would boost the national economy and, therefore, the fundamentals of the real estate industry. However, he downplayed the possibility of such a program producing significant shifts in the economy.

Schnure also covered commercial property pricing in the current market, which he said is supported by economic fundamentals. For example, the occupancy rate of REIT-owned properties hit a record high in the third quarter of 2016.

Rising interest rates could put pressure on cap rates, according to Schnure, but the spread between cap rates and Treasury yields remains wide. “Even as interest rates move up, commercial property prices have quite a bit of cushion to absorb higher interest,” he said. Additionally, Schnure pointed out that REITs tend to perform well during periods of rising rates.

Generally speaking, Schnure said he sees “lots of reason to be optimistic for the year ahead.”