janvier 20, 2022
Top Trends for Real Estate and REITs in 2022 and Beyond
janvier 20, 2022
Top Trends for Real Estate and REITs in 2022 and Beyond
janvier 20, 2022
The Covid-19 pandemic has accelerated disruption in virtually every corner of the global economy— and global real estate is no different. What has traditionally been a slower-moving sector, driven primarily by demographics and local economics, now sits at the epicenter of profound changes in how people live, work, shop and communicate.
Real estate markets are in transition. Yet, favorable global growth coupled with significant secular trends provide active managers with ample opportunity to add value in 2022. We anticipate another strong year for global real estate securities, with cash flow growth and dividends likely to sustain above-trend levels, with our forecasts estimating greater than 10% growth.
To understand how we’re positioning our portfolios for the future, let’s start by reviewing how Global Listed Real Estate performed during 2021.
2021 Listed Real Estate Market Recap
Global listed real estate markets performed well in 2021, returning +27.2% in USD for full year 2021, as measured by the FTSE EPRA Nareit Developed Index. This growth was supported by several macro and fundamental factors, including monetary and fiscal stimulus, continued vaccine distribution, and the reopening—or anticipated reopening— of economies around the world.
North America led the pack with strength in U.S. self-storage (+79.4%), industrial/logistics (+62.6%), residential (+57.9%) and retail (+52.1%), each of which outperformed the index. Both Europe and Asia lagged North America, in large part due to Covid-19 resurgences and/or zero-Covid policy stances that curtailed full reopenings.
Source: FTSE EPRA Nareit, Morgan Stanley Investment Management.
Past performance should not be construed as a guarantee of future performance. Index returns are gross of withholding tax. It is not possible to invest in an index. Groupings are based on how the investment team views the real estate securities universe and do not necessarily reflect official groupings. Provided for illustrative purposes only.
2022 Macro Outlook and Real Estate Backdrop
Morgan Stanley Investment Management’s Global Listed Real Assets team anticipates another strong year for global real estate securities, with cash flow growth and dividend growth likely to sustain above-trend levels of greater than 10%. Meanwhile, real estate operating fundamentals will continue to benefit from strong gross domestic product (GDP) growth, very limited new supply additions, strong credit availability and a wall of capital seeking investment in real estate.
Here’s a closer look at the macroeconomic conditions that support our view for a strong year ahead for global real estate securities.
Source: Morgan Stanley Research, data as of November 14, 2021.
There is no guarantee that these objectives/results will be achieved. Forward-looking statements are by their nature inherently uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, acts of God, and other developments.
INFLATION REMAINS ABOVE TREND
The economics team at Morgan Stanley Research forecasts that inflation in major markets will “peak then retreat” by more than two percentage points throughout 2022 while remaining above-trend level.
Historically, Real Estate Investment Trusts (REITs) have posted positive returns in most rising inflation periods. This is because inflation is typically concurrent with stronger economic growth—and investors consider real estate an inflation hedge. As prices rise, property values tend to appreciate, while cash flow streams also benefit.
The extent to which landlords can pass through price increases depends on lease terms. Short-term leases, such as for hotels, self-storage and residential, are reset frequently and landlords have the ability to adjust rents in reaction to inflationary pressures. Longer duration leases, such as for retail, office and industrial space, often offer inflation protection through fixed rental rate bumps or Consumer Price Index (CPI) linked increases. In light of forecasted above-trend inflation and strong anticipated GDP growth, our team expects real estate cash flows to benefit. Based on expectations for strong cash-flow growth, our team is forecasting 10% year-over-year dividend growth for 2022.
Sources: Bloomberg Economic Data, Morgan Stanley Investment Management. Analysis of FTSE Nareit All Equity REITs Index one-year total return and year-over-year change in Consumer Price Index on a quarterly basis for 20 years ending September 30, 2021. Inflation data based on CPI YoY Index, measure of prices paid by consumers for a market basket of consumer goods & services; collected by the U.S. Bureau of Labor Statistics.
Past performance is not indicative of future results. Data as of September 30, 2021. Indexes do not include any expenses, fees or sales charges, which would lower performance. Indexes are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
WAGES CONTINUE UPWARD TRAJECTORY
Continued economic recovery coupled with labor shortages is driving wages higher. Rising wages fuel consumer strength and spending, which is a positive for many real estate sectors. That said, investors need to weigh these benefits against the impact of higher wages and limited labor availability on everything from construction costs to operations.
We think labor shortages will ease as workforce participation increases on the margin, but caution that landlords with more operationally intense cost structures will see outsized expense growth versus their peers. This underscores the importance of technology adoption in 2022.
Source: Bloomberg Economic Data:
Wage Growth based on WGTROVER Index; measure of nominal wage growth of individuals based on median percent change in the hourly wage of individuals 12 months apart; collected by the Atlanta Fed, https://www.atlantafed.org/chcs/wage-growth-tracker.aspx
Inflation data based on CPI YoY Index, measure of prices paid by consumers for a market basket of consumer goods & services; collected by the US Bureau of Labor Statistics.
RATES REMAIN LOWER FOR LONGER
Strong global economic growth suggests that central banks and governments will begin removing monetary and fiscal support. The Federal Reserve (the “Fed”) has begun tapering its bond purchases and is likely to announce nominal rate hikes in 2022, with most central banks around the globe expected to follow the Fed’s lead.
While the conventional wisdom is that rising interest rates are bad news for real estate, history has shown that rising interest rates—when accompanied by strong GDP growth—create a favorable backdrop for real estate and real estate securities. This is because, unlike fixed income and many other yield-producing assets, real estate retains economic sensitivity and pricing power.
Moreover, our outlook for rates to remain lower for longer has not changed. Low absolute interest rates continue to add fuel to investors’ search for yield—and as of December 2021, according to Preqin, $376.3 billion of undeployed capital is sitting on the sidelines and ready to be invested in real estate.
Source: Nareit analysis of FTSE Nareit All Equity REITs Index via FactSet, 10 Year Treasury Constant Maturity Rate via FRED from Q1 1993 through Q3 2021. Quarterly intervals of 12 month rolling returns.
Past performance is not indicative of future results. Provided for informational purposes only and should not be deemed as a recommendation or offer to buy or sell any security.
Five Top Trends for Real Estate and REITs to Watch in 2022
Favorable economic growth conditions bode well for real estate securities. While this has typically been the case, the investment outlook in the year ahead is far more nuanced. The Covid-19 pandemic has accelerated and introduced new market dynamics, creating significant and, in many cases, surprising dispersions—and opportunities—within sectors and regions.
More than two decades ago, the arrival of “dot coms” set in motion profound changes that have touched every industry, including real estate. Demand shifted from retail centers to warehouses and data centers, while more flexible work arrangements changed the dynamic for office space.
Then Covid-19 accelerated all of these trends, prompting a dramatic—and in many cases permanent—shift in consumer, employee and organizational behaviors and norms.
Now that hybrid and remote work is part of the lexicon and no longer an exception, real estate is undergoing a permanent shift. Office property in many cities and business-focused hospitality continue to suffer impaired demand and values.
However, the actual impact on office demand will vary by city and an increased focus on health, wellness and safety could serve as a partial offset to demand impairment; a nuanced approach to top-down trend analysis will be necessary for active managers. Office utilizations globally recently ranged from approximately 15% to upwards of 70%, with some of the lowest utilization in San Francisco, Seattle and New York, and some of the highest in Stockholm, Paris and Hong Kong.
Similarly, essential business travel will return, but likely not to pre-pandemic levels, as corporations appreciate the cost efficiency of virtual environments. That said, leisure travel has, in many places, recovered to 2019 levels. We’re also seeing notable regional differences, based in part on vaccination rates and local travel mandates.
Retail has experienced a significant secular decline as e-commerce has shifted demand from storefronts to warehouses, data centers and logistics. Here too, there has been a disconnect between the growth of overall retail sales and demand for retail property.
However, there now is a renewed appreciation for the storefront as retailers rethink the role of the physical storefront in distribution and, in some cases, brand development. There will likely continue to be square footage rationalization as e-commerce grows, but brick-and-mortar retail isn’t going to zero. The pandemic has underscored the importance of a physical location in a true omnichannel distribution environment. Consequently, retailers are reinvesting in their stores and looking to sign leases in premium retail centers globally.
Improving retail fundamentals also bode well for this sector. Supply chain issues are on track to resolve in 2022, leading to inventory restocking and increased spending for items with pent-up demand. Consumer spending is expected to remain strong in 2022—supported by rising wages, higher personal income and robust savings levels. Likewise, retailer bankruptcies are projected to be very low in 2022, given improved tenant credit and prior year fall-out.
Source: Citi Research, data as of December 8, 2021.
Data calculated by aggregating public announcements of U.S. bankruptcies and their accompanying U.S. store closings per year.
Real estate is reinventing itself to serve its original purpose—to facilitate commerce, store goods and provide shelter—but made for a digital age. While technology has shifted real estate demand from physical retail or office space to data centers, cell towers and logistics facilities, it will create winners and losers in real estate.
Landlords are now adopting “prop-tech” to improve everything from sales and marketing, to back-office functions, and building management. For example, in residential property, such features as smart locks, self-guided tours and online lease applications are selling points for many prospective tenants, who have grown more comfortable with a wide variety of technological applications in day-to-day life. This is particularly important today, and we believe that early adopters of technology will be better insulated from expense pressures driven by higher wages and labor shortages.
Given that real estate has one of the lowest technology adoption rates among global industry categories, real estate companies and investors have a significant runway to reap the benefits of increased integration.
Source: Ernst and Young LLP Real Estate Owners Survey, data as of March 2020. Tech adoption in commercial real estate demands a robust corporate strategy, E&Y LLP 2020. “IoT” is defined as “Internet of Things.”
The world’s largest businesses, governments and investors are committing to achieving carbon neutrality by 2050—and this has significant implications for global real estate.
According to the United Nations Environment Program, building operations and construction represent 39% of global greenhouse gas emissions. It estimates that direct building carbon emissions will need to be cut by half by 2030 to get on track for 2050.
At the same time demand for green building features and energy metering is growing, tenants are also prioritizing health, safety and wellness. We believe this will lead to a new capital expenditure cycle for commercial real estate. Those landlords that have already focused on energy efficiency, best-in-class air filtration, and water and waste reductions are best positioned to navigate these increasing costs going forward, as significant investment will have already taken place.
While the growing focus on sustainability is a global trend, it is important to note that there are regional differences due to existing norms and new or expected regulations that mandate energy efficiency.
Share of buildings and construction energy and emissions, 2017
Source: Global Alliance for Building and Construction, 2018 Global Status Report.
With absolute interest rates likely to stay lower for longer, the search for yield is and remains intense. Among the universe of investable asset classes, real estate offers some of the highest yields, second only to global high-yield bonds.
Further, private funds have raised significant capital to deploy earmarked for global real estate. We expect that bid/ask spreads will narrow further as renewed GDP growth, successful vaccine dissemination and the re-opening of economies create more clarity on the cadence of cash flow recovery and real estate values.
As fundamentals improve, transaction activity should increase. All told, we believe that M&A activity and privatizations in 2022 will exceed levels in 2021, which saw a wave of transactions.
Source: FactSet for Equity Index Dividend Yield; BlackRock Aladdin for Fixed Income Index Nominal Yield; FactSet EcoWin database for 10 Year U.S. Treasury Yield.
Asset classes represented by the following indexes: U.S. Large Cap: S&P 500 Index; U.S. Small Cap: Russell 2000 Index; Developed Markets: MSCI World Index; Global Investment Grade: Bloomberg Barclays Global Aggregate Bond Index; Global High Yield: Bloomberg Barclays Global High Yield Total Return Index; Emerging Markets: MSCI Emerging Markets Index; Developed Listed Real Estate: FTSE EPRA Nareit Developed Extended Index; U.S. REITs: FTSE Nareit All Equity REITs Index; U.S. TIPS: Bloomberg Barclays TIPS Index.
Past performance is not indicative of future results. The views, opinions and forecasts expressed herein are those of the investment team as of December 2021, are not necessarily indicative of those of Morgan Stanley, are subject to change based on market, economic and other conditions, and may not necessarily come to pass. Data displayed for December of each year. December 2021 chart data represents an estimate.
Data represents month of December 2021 estimates. Asia-Pacific includes Asia (11.9%) and Australasia (1.8%). Other includes Multi-Regional (0.9%), Americas (0.8%), Middle East & Israel (0.3%), and Africa (0.1%)
Looking to 2022, above-trend GDP expansion, and continued real estate fundamental recovery, coupled with attractive relative valuations, lay the foundation for another year of growth for global real estate and REITs.
Meanwhile, significant inner-sector dispersion—particularly for securities tied to retail, office and hospitality—provides opportunities for active stock pickers. While we’re positive on global real estate overall, we think key trends in 2022 will provide additional tailwinds for select sectors and companies.
Source: Morgan Stanley Investment Management. The views, opinions and forecasts expressed herein are those of the Global Listed Real Assets investment team as of December 2021, are not necessarily indicative of those of Morgan Stanley, are subject to change based on market, economic and other conditions, and may not necessarily come to pass. Past performance is not indicative of future results.
Global Listed Real Assets Team: Investment Philosophy
The identification of relative value is at the forefront of real estate investing at Morgan Stanley Investment Management (MSIM). MSIM’s Global Listed Real Assets team uses proprietary research to invest in publicly traded real estate securities that we believe offer the best value relative to their underlying assets and growth prospects. The team combines a bottom-up approach, assessing the intrinsic value, equity multiples and growth prospects of each security, with a top-down view that incorporates fundamental inflection points, macroeconomic considerations, and geopolitical and country risk. By incorporating both an equity market valuation and a more traditional real estate valuation with a top-down overlay, we believe our strategies are well prepared to identify securities with the best expected total returns.
Investing entails risks and there can be no assurance that any strategy will achieve profits or avoid incurring losses.
Asset Allocation/Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, investors can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks.
In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Real estate investments, including real estate investment trusts (REITs), are subject to risks similar to those associated with the direct ownership of real estate and they are sensitive to such factors as management skills and changes in tax laws. The risks of owning real estate directly as well as the way Real Estate Operating Companies (REOCs) are organized and operated will affect the Portfolio. They require specialized management skills, causing a Portfolio to indirectly bear the costs of such skills. In addition, foreign real estate companies may be subject to the laws, rules and regulations governing those entities and their failure to comply with those laws, rules and regulations could negatively impact the performance of those entities.