Defined Benefit

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

Hotels, Retail Face Pandemic Headwinds; REITs Gain but Lag Equities
2 min 0 sec

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.

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts
Defined Benefit

2021—Starting Off with Gusto!

Kristin Bradbury
How the economy did in 1Q21, and the outlook ahead.
Defined Benefit

What We Found in Our Latest COVID-19 Survey of Investment Managers

Amy Jones
The 3rd edition of our Coping with COVID-19 survey of investment managers focuses on plans for office reopenings and vaccination policies.
Defined Benefit

The Gray Areas in Green Bonds

Kristin Bradbury
A common challenge for those investing in green bonds is that there is no uniform set of requirements or standards. This makes analysis and monitoring...
Defined Benefit

The Story Behind Callan’s 2021 Capital Markets Assumptions

Capital Markets Research
An explanation of Callan's 2021-2030 Capital Markets Assumptions, how they were developed, and what changed from last year's projections.
Defined Benefit

GameStopped—Or Just Getting Started?

Jim McKee
A key issue highlighted by GameStop is the unintended consequences of zero-cost money and commission-free trading enabled by today’s highly stimulat...
Defined Benefit

Relief Bill Provides a Shot in the Arm to Corporate Pensions

William Emmett
The $1.9 trillion economic relief bill included another round of pension funding relief that reduces required, tax-deductible contributions for single...
Defined Benefit

Bloomberg Barclays Pricing Time Change and What It Means for Institutional Investors

Kyle Fekete
Asset owners, investment managers, and other parties may experience discrepancies in reporting point-in-time pricing or performance as a result.
Defined Benefit

Why the Yield Curve Is Really Curving

Dario Buechi
As prospects for growth have brightened, yields on longer maturity bonds have risen while short-term rates have been anchored by the Fed.
Defined Benefit

What Investors Need to Know About the Potential Eviction Crisis

Aaron Quach
Institutional investors should continue to closely monitor rent collections within their multifamily portfolios, as decreases in collections may indic...
Defined Benefit

Private Equity Goes on a Roller-Coaster Ride

Gary Robertson
A rough averaging across fundraising and private investment and exit volumes indicates a drop of only 20% for private equity activity in 2020 from 201...