Institutional Investors

Hotels, Retail Face Pandemic Headwinds; REITs Gain but Lag Equities

Hotels, Retail Face Pandemic Headwinds; REITs Gain but Lag Equities
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Pandemic continues to challenge Hotels and Retail

  • Hotels and Retail are the most challenged sectors while Office faces uncertainty; Industrial remains the best performer.
  • Income remains positive except in the Hotel sector.
  • Appraisers have more certainty on the pandemic’s impact on valuations.
  • Return dispersion by manager within the ODCE Index is due to the composition of underlying portfolios.

More than $200bn of dry powder

  • U.S. core open end funds have investment queues of roughly $5 billion and exit queues of $20 billion.
  • More than $200 billion of capital waiting to be deployed in North America
  • Majority of dry powder capital in opportunistic, value-add, and debt funds

Fundamentals will continue to be affected

  • Vacancy rates for all property types have been or will be affected.
  • Net operating income has declined as Retail continues to suffer.
  • 4Q20 rent collections showed relatively stable income throughout the quarter in the Industrial, Apartment, and Office sectors. The Retail sector remains challenged, with regional malls affected most heavily.
  • Class A/B urban apartments relatively strong, followed by certain types of Industrial and Office
  • Supply was in check before the pandemic.
  • New construction of preleased industrial and multifamily is occurring.
  • Transaction volume dropped off during the quarter, except for multifamily and industrial assets with strong-credit tenants, which are trading at pre-COVID-19 levels.
  • Cap rates remained steady during the quarter. The spread between cap rates and 10-year Treasuries is relatively high, leading some market participants to speculate that cap rates will not adjust much. Price discovery is happening and there are limited transactions.
  • Callan believes the pandemic may cause a permanent re-pricing of risk across property types. Property types with more reliable cash flows will experience less of a change in cap rates; however, those with less reliable cash flows will see greater adjustments.
Real Estate Sector Quarterly Returns by Property Type and Region

Global REITs increased but slightly lagged equities

  • Global REITs underperformed slightly in 4Q20, gaining 13.3% compared to 14.0% for global equities (MSCI World).
  • U.S. REITs rose 11.6% in 4Q20, lagging the S&P 500 Index, which jumped 12.1%.
  • Globally, REITs are trading at a discount to NAV with the exception of those in the U.S., Singapore, and Australia.
  • Sectors are mixed, between trading at a discount or premium.
  • Ongoing volatility in REIT share prices offers opportunities to purchase mispriced securities, individual assets from REIT owners, and discounted debt, as well as lend to companies and/or execute take-privates of public companies.
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