2020: Don’t Let the Door Hit You on the Way Out
The titles of some of Green Street’s most popular research reports reveal just how bleak market conditions appeared for commercial real estate investors for much of the year:
Heard on the Beach: The Sum of All Fears (3/22)
REIT Insights: Missing Rents and Declining Property Values (4/14)
Property Insights: Toward the Fiscal Cliff (5/18)
Mall Sector Update: The Beatings Will Continue Until Morale Improves (5/27)
In fact, Green Street’s most widely read report of 2020 (Heard on the Beach: The End of the Beginning, 4/16) proclaimed “Equity investors have concluded that commercial property has the equivalent of a pre-existing condition: the 25% decline in US REIT prices since Covid concerns took hold is notably worse than the 16% decline in the S&P 500.” In a report the following month, we said: “Net Operating Income (NOI) for most property sectors is expected to decline this year, with the magnitude of some declines unthinkable prior to the onset of the Covid pandemic.” (Heard on the Beach: Sector Allocation in a New World, 5/13)
Pretty dark, admittedly. But even the chart below outlining the extent of the anticipated carnage as of May (our forecasts have been adjusted since) came with important context. “The deep NOI shortfalls (vs. prior expectations) will be mostly felt over the next year, though it will take a few years for things to settle. The silver lining for most investors is that short-lived disruptions have a limited effect on value.”
NOI Over the Next Five Years vs. Pre-Covid Expectations & Impact on Property Value
For investors seeking to structure portfolios beyond Covid’s near-term impact, Green Street’s mainstay approach toward sector allocation – expected long-term returns are derived from estimates of initial yield, cap-ex, and intermediate and long-term growth – provides the most meaningful insight. Throughout the pandemic, Green Street continued to highlight opportunities not only to minimize damage from declining commercial property values but to prosper as well.
“Covid has accelerated the growth of virtual commerce facilitated by digital real estate at the expense of business conducted in traditional brick and mortar locations.” (Heard on the Beach: Real Estate for Tomorrow’s Economy, 10/15) “Public market pricing indicates that non-traditional real estate sectors will continue to grow in the future while key core sectors shrink. For property investors, aligning portfolios with the economy of tomorrow seems like a good idea.”
For visual confirmation, look at the growth of non-traditional sectors vs. core in the Nareit All Equity Index since 2000.
FTSE Nareit All Equity REITs Index Composition
Green Street initiated new coverage in three of those non-traditional sectors during 2020: Tower, Gaming and Cold Storage.
In July, we began covering Americold Realty (COLD), the only Cold Storage “pure-play” REIT, reasoning “COLD presents investors with an intriguing opportunity. There are some unique valuation challenges - mostly higher operating leverage - but investors are presented with compelling internal and external growth attributes in a niche, quickly consolidating sector.”
Green Street added two REITs - Crown Castle (CCI) and SBA Communications (SBAC) - to our coverage of the Tower sector in October. With growth fueled by rising demand for communication and data, Tower is the largest REIT sector, with an enterprise value of more than $300 billion.
In January, we initiated coverage of the Gaming sector with three REITs (MGP, GLPI and VICI) that control 35% of the commercial real estate for the gaming industry. The sector has recovered solidly from pandemic-mandated casino shutdowns, and it continues to benefit from online gaming growth, which helps the finances of the sector’s main tenants based on ownership or partnership in i-gaming companies.
Among the more traditional sectors, we anticipated for most of the year that Manufactured Homes and Industrial would be the clear NOI winners, with Lodging and Malls suffering the biggest declines.
Indexed Net Operating Income by Property Type: '19-'24
One of Green Street’s unique strengths is combining bottom up sector/company research with a strategic perspective focused on wide-ranging impacts on property sectors, markets and individual assets. In Property Insights: Urban Flight (8/19), we wrote “Urban population growth and housing demand slowed in the middle of the last decade in part due to the departure of aging millennials. As with many other trends, Covid acted as an accelerant.” We expect a sustained shift to the suburbs due to crime, taxes, demographics, and remote work.
November brought welcome news, “that Pfizer and Moderna have invented Coronavirus kryptonite and the final chapters and timing of the Covid saga have become much clearer. Tough days lie ahead, but investors are now presented with a much tighter range of Covid outcomes…” As a result, our forecast for the U.S. economy brightened considerably:
U.S. GDP (Real: 4Q19 = 100)
The tone of our report titles brightened as well:
Net Lease Sector Update: Green Light…Go (11/15)
Lodging Sector Update: A Light at the End of the Tunnel (11/20)
Health Sector Update: Reason for Holiday Cheer (12/04)
Residential Sector Update 2021: A Sight for Sore Eyes (12/07)
As we enter a new year, astonishing vaccine results are a reminder the darkness will clear. Green Street’s Commercial Property Price Index increased 1.8% in November, and further increases in private-market pricing are likely. Coming soon in January, Green Street will release 2021 Sector Outlooks for 12 property sectors across the U.S. and Europe. We’re excited to introduce new U.S. Outlooks for Single-Family Rentals and Senior Housing in the U.S., as well as to expand our European Real Estate Analytics coverage through the addition of Residential.
We hope you’ll enjoy a prosperous New Year and consider Green Street for the unique and unparalleled insights we can provide. Green Street’s comprehensive client platform, which encompasses exclusive news, trusted proprietary databases, interactive mapping and analytics, and an abundance of top-quality public and private market research, offers a powerful one-stop-shop for actionable commercial real estate intelligence to drive better decision-making.
- Green Street Commercial Property Price Index – view latest update
- Webinar Replay: Still “Out of Office” in ’21? – December 9, 2020
- Contact Us for the full list of Green Street’s top 2020 reports. Clients can access through the Research Library
- Podcast: Deurbanization and public-private market pricing
- Enhanced transaction data in Green Street's Atlas mapping platform! Schedule a demo
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