Summary
The Fall Nareit conference, REITWorld, gathered investors, analysts, management teams, bankers and other professionals associated with the listed real estate world in Los Angeles on Nov. 14-16th, 2023. Green Street analysts conducted discussions with many of the 80+ companies in the ~20 different property sectors in our U.S. coverage universe.
The REITWorld conference was highlighted by the enthusiasm for the strong equity market reaction (REITs +5% on 11/14) to the 20+ bp decline in the 10-year Treasury note at the outset of the event. This set a seemingly resilient tone as many participants have grasped the reality of higher rates yet harbor the hope for a continued decline in borrowing costs. Other common threads include 1) cautious optimism on the economy coupled with a realistic view of fundamentals in sectors with clear deceleration (e.g., apartments, industrial); 2) a focus on preserving capital and managing the balance sheet, although most REITs are in a sturdy position, and many teams hope to eventually go on offense; and 3) managing through further likely property value declines. Reaction to commentary heard in a few sectors leaned slightly positive at the margin relative to the very recent 3Q23 earnings season (e.g., SFR, skilled nursing, cold storage, life science).
Property sector-specific takeaways follow:
Apartments - Price Shopping
The tone of apartment meetings was subdued as management teams are realistic about the supply challenges ahead in '24. On the capital allocation front, teams seem fatigued with high costs of capital (i.e., ~20% NAV discounts) that are restraining near-term external growth prospects. However, the companies are hopeful that tighter debt markets will lead to a convergence between private and public market values, and greater external growth opportunities in the coming years.
Cold Storage - Ramping up External Growth
Americold is close to finalizing its first development project through its new partnership with seaport operator DP World. The first project will be located in Dubai through its joint venture with RSA Cold Storage where COLD is a 49% owner. RSA will operate the facility as Americold does not have an existing presence in the Middle East. The second project will likely be at The Port of St. John in Canada where COLD will be the sole owner and operator given it has an existing Canadian platform. A seaport in LATAM could follow. Additional details on costs and timelines should be released soon. Management indicated stabilized yields should be in line with its current pipeline, which are in the 10% to 12% range.
Industrial - All about Building Size
Commentary at the conference generally aligned with the recent earnings season. Big picture, market rent growth in non-coastal markets, especially in the Sun Belt, will outpace that in coastal markets this year. That said, South Florida remains particularly strong while Southern California is a laggard with rents that are likely down moderately (5% to 10%) in the Inland Empire and down slightly in Los Angeles and Orange County. Despite recent trends, SoCal still sports the largest lease mark to market across REIT portfolios, as cumulative rent growth since Covid has outpaced every other market. Several management teams noted an uptick in tenant interest, such as touring requests and tenant RFPs, for SoCal warehouse space in the last several weeks, a potentially encouraging sign.
Lodging - Another Leg of Growth Ahead?
Lodging REIT executives remain upbeat about the current state of fundamentals with the set up in many urban markets being especially favorable heading into next year. Companies point to robust citywide convention calendars that are contributing to a double-digit YoY group revenue pace for FY24 for most portfolios. Management teams are significantly less upbeat as it relates to business transient demand, though a modest level of growth is expected coming off a low base of demand. While domestic leisure travel, particularly in drive-to resorts, has largely stalled out with recent RevPAR experiencing modest YoY declines, many management teams anticipate that resort markets will soon stabilize and begin growing once again. That said, this view is partially driven by the expectation that the trend of U.S. citizens traveling abroad will reverse. Consistent with our initial thoughts coming out of earnings (Earnings Recap: Hanging Tough), there appears to be upside to Green Street’s FY24 Upper Upscale RevPAR estimate (~3% YoY growth).
Net lease & Ground Lease - Hitting the Brakes
Transaction activity across the Net Lease (NL) space continues to slow as volatility in capital costs and still-high seller expectations keep bid-ask spreads wide. NL REITs remain reluctant to tap the equity markets at current prices and expect to rely more on “free cash flow” (after dividend payments) and dispositions to fund future acquisitions. This dynamic is expected to keep a lid on NL REIT investment volumes in ’24.
Office - Awaiting for a Recovery
The office sector faces continued challenges with sustained remote work trends and an uncertain macro outlook. While most office REITs noted optimism around leasing pipelines that are above the levels seen in early ’23, time to lease execution is longer. This has resulted in signed leasing volume below ’22 levels. Small and medium sized tenants continue to drive the bulk of leasing activity with larger tenants slower to transact (i.e., more internal approvals needed and a longer lease execution process) and more likely to reduce space needs.
Self-Storage - A Rocky Year Ahead
Move-in rent declines were initially expected to improve to flat or slightly negative territory through the back half of ’23, as year-over-year comps got easier. However, declines remained in the double-digits through October, as operators ubiquitously cut rates to attract new customers. Notably, REIT data shows that customers have been price shopping more than usual, somewhat justifying the rate cuts.
Single-Family Rental - A Captive Audience
SFR fundamentals remain on firm footing heading into year end, with blended lease spreads running in the mid-to-high-5% range in the seasonally soft 4Q, trending ~500 bps north of Sun Belt apartments. Mid-to-high single digit renewal growth rates are likely to continue next year given a limited amount of affordable single-family supply, and an all-time wide spread between ownership and renting costs. Between AMH and INVH, AMH boasts stronger new lease growth rates into year-end (~5% vs. ~3%) and INVH is seeing better renewal pricing (~9% vs. ~6%). Southwest markets (Phoenix and Vegas) represent relative pockets of weakness with Southeast markets seeing the best growth.
RCX believes the sources relied upon herein are reliable, but takes no responsibility for its accuracy.
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