Are REITs a Good Investment Right Now?

By: Eric Bank

Added: 1st June 2019

These are some metrics that impact REIT Performance:

  • 2018 Q3 GDP was 3.4%, down 1.2 percentage points from the previous quarter. The latest forecast for 2018 Q4 GDP is 2.5%.
  • About 304,000 jobs were added to the labor market in January 2019, and the national employment rate inched up to 4.0%.
  • The 2018 Consumer Price Index, a measure of inflation, increase 1.9% on an unadjusted basis.
  • As of February 4, 2019, the yield on the U.S. 10 year treasury note stood at 2.70%.

One of our favorite economic analysts is Calvin Schnure at NAREIT. His top-line opinion of 2019 is that it will be a good but not great year for REITs. Naturally, prognosticating is risky business, and really the best one can do is to assign probabilities to different scenarios. Schnure weighs the macroeconomic alternatives and selects these outcomes as the most likely:

  • GDP: Most likely to ease a little from 2018, settling between 2.5% and 3%. What can sour this forecast? Higher energy costs and stupid trade wars. Our opinion is that in the case of hot, real war, all bets are off. A strong GDP generally helps REITs. Too strong, and investors become worried about the approaching end of the business cycle.
  • Labor: Schnure is optimistic about continued strength in the labor market, with monthly job growth exceeding 200,000. The January 2019 figure was boffo, and it does seem we are at full employment. The question is whether job creation will be stilted by a dwindling supply of workers. This largely depends on whether wage growth will accelerate enough to meaningfully increase the labor force participation rate. A strong labor market helps REITs, as demand for housing, office space, retail, hotels, industrial property and other sectors feed off higher discretional spending.
  • Inflation: Schnure sees inflation continuing at current rates, rising between 1.7% and 2.2% for the year. This is still a low inflation environment, but the aforementioned wage growth could heat things up. Worldwide manufacturing capacity is still good, so inflation will most likely remain tame for the foreseeable future. Inflation hurts REITs to the extent they invest in new properties at higher prices due to labor and material cost increases.
  • Interest rates: The Federal Reserve just signaled a more dovish stance toward rate increases. However, Schnure sees 10-year rates ranging from 3.25% to 3.75%. In other words, rates will rise only modestly. Low interest rates are good for REITs.

The bottom line is that interest rates probably won’t choke off investment in real estate, and a strong economy will support demand for housing. Although some markets are experiencing a supply hangover for the first time in years, rents should, at worst, remain flat for most of the year. In most cities, shortages for multifamily housing remain. Wage increases are the necessary fuel to keep the multifamily market strong. Besides multifamily, Schnure likes the office, shopping centers and industrial sectors. In general, he sees property prices rising in 2019 and is a little nervous that valuations may become excessive. But he isn’t convinced we are in danger – yet.