Industrial REIT pricing points to a forecast upgrade - Capital Economics
US Commercial Property

Industrial REIT pricing points to a forecast upgrade

US Commercial Property Update
Written by Kiran Raichura
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The performance of the major FTSE NAREIT sub-sectors since the end of 2019 appears to suggest that our forecasts for 2021 might be too weak for industrial and too strong for the office and apartments sectors. But while we expect to upgrade our industrial forecasts in the coming weeks, we are less convinced that we need to make downgrades to the office and apartment sectors.

  • The performance of the major FTSE NAREIT sub-sectors since the end of 2019 appears to suggest that our forecasts for 2021 might be too weak for industrial and too strong for the office and apartments sectors. But while we expect to upgrade our industrial forecasts in the coming weeks, we are less convinced that we need to make downgrades to the office and apartment sectors.
  • Listed real estate prices were amongst the worst-hit in the initial phase of the stock market downturn, with the equity REITs index (ex. timber and infrastructure) plummeting by 44.6% from peak to trough in little over a month. But there was a wide dispersion of performance between sub-sectors, with data centre REITs falling by “just” 25.2%, while regional mall REIT prices dropped by 66.9%. (See Chart 1.)
  • In the initial recovery phase, apart from offices, the smallest fallers went on to see the sharpest recoveries, with data centre and industrial REITs quickly returning to their peaks. Yet since then, the reverse has been true. The best performers have been those sub-sectors with the most to gain by a return to normality – shopping centres, regional malls and hotels. On the other hand, industrial and self-storage REITs have seen only limited gains, while data centres have seen a small fall in prices. Office REITs have again lagged to a certain extent, leaving them 25.2% below their peak, reflecting the structural forces facing the sector.
  • REIT price movements are widely accepted to lead direct market performance by around 3 to 6 months. As a result, they can help inform our views on the near-term outlook for the direct market. So, what might the performance of the REIT sub-sectors over the last year or so tell us about the short-term outlook?
  • Chart 2 shows a comparison between REIT sub-sector price growth since the end of 2019 and our expectations for capital growth in the 2020-21 period in the equivalent MSCI sub-sectors. It therefore shows us where our views differ most from REIT pricing. Apartments and offices stand out as markets where we are more confident than REIT investors. On the other hand, industrial REIT prices suggest our capital growth forecasts for that sector might be too low.
  • Dealing with the latter first, we under-predicted the Q4 outturn for industrial and, given the sector’s momentum and continued strong investor demand, we’re likely to upgrade our 2021 forecast from an already-strong 6.5% y/y.
  • But in the case of apartments and offices, we don’t envisage any major downgrades. Indeed, while we see office values falling by another 5% by the end of 2022, it looks like REIT investors may be too negative on the sector, though admittedly there are downside risks. For apartments, we think that tenants will return to cities later this year, prompting a recovery in occupancy and rental levels, supporting capital value growth of around 3% y/y.

Chart 1: FTSE NAREIT Sub-Sectors
(Index, 100 = Feb. 2020 Peak)

Chart 2: Comparison between REIT Sub-Sector Price Growth and CE Capital Value Growth Forecasts (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Kiran Raichura, Senior Property Economist, kiran.raichura@capitaleconomics.com