REIT Fundamentals Keeping Market on “Solid Keel”

In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, said REIT fundamentals should keep the market on a “solid keel” for 2017 and 2018.

Occupancy levels at REIT-owned properties are at record highs, Schnure said, while net absorption continues to outpace a fairly moderate supply pipeline.

Looking at the broader economy, Schnure commented that it is showing “moderate momentum, but it’s not running hot.”

Turning to monetary policy, Schnure said he does not expect future interest rate increases to have much impact on the real estate economy.  One reason for this is the lack of leverage in the market.

Total commercial mortgage debt has only grown about 5 percent a year, Schnure explained. REITs have been particularly “solid” in this regard, with about the lowest level of leverage in two decades, according to Schnure.  REITs have also raised about $200 billion in the past several years, “so they’re in a quite solid position,” he noted.

At the same time, Schnure stressed that interest rates remain historically low and that the increases being discussed by members of the Federal Reserve are “very modest.”

“The commercial real estate economy - and REITs in particular - should do just fine with this interest rate outlook,” Schnure said.

Meanwhile, Schnure also noted that the Fed has raised concerns about the commercial real estate economy, particularly valuation increases and whether potential risks exist.

Schnure pointed out the valuations have slowed down during the past couple of months. He added that while capitalization rates are low, they should be viewed in the context of an overall low-yield environment.