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.
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.