The latest weaker-than-expected ISM numbers and lower job additions make a rate hike look like a far-away event. This brings some near-term security for REIT investors.
Is the Economic Slowdown a Blessing for REITs?
Obviously not. If economic activities slow down, the fortunes of this special hybrid asset class would suffer as well. In fact, fewer job additions and a thinner purse can prove detrimental for several asset types. Demand for office space could be at stake if fewer jobs are created. Moreover, the ability to pay higher rents for apartments could be dented.
A thinner purse also lowers one’s purchasing capacity, leading to softer demand for retail goods. This could end up in less store openings and reduced demand for spaces from retailers in malls and shopping centers. Moreover, lower demand for retail goods and weaker-than-expected manufacturing activities may lead to a slump in demand for distribution facilities.
Ultimately, if economic activity slows down, chances of any recovery in the fundamentals would remain elusive for an extended period. Vacancies would increase and the ability to charge higher rents by landlords would fall.
Specific Market Weakness
There are also specific market weaknesses that can dampen the growth momentum of the real estate landlords. Take for example the apartment REITs. For them, a rise in supply in many of the markets raises an alarm. This is because higher supply usually curtails the landlord’s ability to demand higher rents and leads to lesser absorption.
In fact, the increase in deliveries of new units has already kept industry behemoths like AvalonBay Communities Inc. (AVB) and Equity Residential (EQRÂ -Â Analyst Report) on their toes.
For AvalonBay, revenue growth remains constrained in New York City due to higher supply. Moreover, in the urban submarkets of Boston and Seattle, significant new supply is delivered compared to the suburban submarkets. This is leading to a slowdown in urban growth rates.
Even for Equity Residential, in the balance of 2015, a number of the company’s markets are expected to witness elevated deliveries. As a result, new leasing is anticipated to face pressure and pricing might be adversely impacted in such regions with elevated supply. Markets such as Washington DC, Brooklyn and Irvine are specific areas of concern because of this.
