Advertisement
U.S. markets open in 1 hour 15 minutes
  • S&P Futures

    5,308.50
    +0.25 (+0.00%)
     
  • Dow Futures

    40,163.00
    +19.00 (+0.05%)
     
  • Nasdaq Futures

    18,506.00
    +2.25 (+0.01%)
     
  • Russell 2000 Futures

    2,142.40
    +4.00 (+0.19%)
     
  • Crude Oil

    82.45
    +1.10 (+1.35%)
     
  • Gold

    2,232.40
    +19.70 (+0.89%)
     
  • Silver

    24.68
    -0.07 (-0.27%)
     
  • EUR/USD

    1.0791
    -0.0039 (-0.36%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    13.04
    +0.26 (+2.04%)
     
  • GBP/USD

    1.2621
    -0.0017 (-0.14%)
     
  • USD/JPY

    151.3230
    +0.0770 (+0.05%)
     
  • Bitcoin USD

    70,472.86
    +208.62 (+0.30%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.37
    +20.39 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Commercial real estate will recover sooner rather than later: REIT analyst

Rich Anderson, SMBC Nikko Securities America REIT analyst joins Yahoo Finance Live with a look at the state of the real estate sector amid the Covid-19 pandemic, return to office plans, and the impact of interest rates on the REIT marketplace.

Video Transcript

[MUSIC PLAYING]

MYLES UDLAND: All right, welcome back to "Yahoo Finance Live" on this Tuesday morning. We've talked a lot about the outlook for the real estate space, particularly single-family home space. But let's broaden out and think about the entire sector as a space and return to office, multifamily. You've got all kinds of other distribution, warehouses, fitting in there.

Joining us now to talk about all of this is Rich Anderson, senior REIT analyst over at SMBC Nikko Securities America. Rich, thanks so much for jumping on this morning. I want to start with the return to office and how you guys are thinking about the way office space is going to be used because as you highlight in your notes to us, we saw a major transition in the office 15 or 20 years ago, going from cubicles to a more open floor plan.

As you talk to folks and think through that, what does that physical use of the space look like? And does it lead to companies needing less space? Or are those footprints, in your view, kind of going to remain the Same?

RICH ANDERSON: It's a great question. And thanks for having me. The office space, over the past 20-plus years, has always been on a sort of evolutionary path. As you mentioned, cubicles to open floor plans. And to some extent, now we're going to have some element of hybrid office in the aftermath of the pandemic.

It is a question, will that mean less or more demand for office space? And that's kind of a TBD. But the way we're thinking about it is you perhaps need social distancing within the four walls of office. So that might offset some of the lack of demand. But I think the business will trade on the recovery of office, the increased census of occupied space as we kind of navigate this wave of the Delta variant.

And I don't think that the landing spot of office is going to be wildly dismantled versus pre-pandemic. I think it'll look a fair amount like it used to, with some element of hybrid that we've built into it that kind of resembles, like, a WeWork execution with hot desks and things like that.

So it'll be interesting, evolutionary. And the question won't be answered for many years from now.

JULIE HYMAN: Rich, it's Julie here. It seems impossible though, to imagine that there won't be less of it, right? I mean, sort of at one point in the pandemic, there was talk about office space migrating to the suburbs, just as people had. But we're reporting on companies every day that are going hybrid in some measure for some portion of their workforce.

So just looking at that anecdote, "anec-data," for lack of a better word, it seems impossible to think that there just won't be less office space overall that is needed.

RICH ANDERSON: Right. So over the years, the office business, in terms of density, went from about 250 square feet per employee to about 150 square feet per employee. And so that would naturally mean less demand for office. And yet, magically, that didn't really happen.

And so you have different executions about how office space is utilized. And it may be easy to imagine less demand for space. And that might be true to some degree five years from now. But I don't think as a stock analyst, I'm so worried about what the landing point is of office demand and the ideas about what might be imagined today.

I think there is going to be recovery in the utilization of space today. There will be some element of hybrid office. And that's something that we'll figure out as we go. And if we don't get all the way back to full demand pre-pandemic, perhaps a conversation for another day.

As from the REITs perspective, it's about the recovery right now. And it's about getting people back into the office.

It's an interesting thing, packed stadiums, packed restaurants, and yet no one's going into the office. What a great social world for all of us these days. But I don't think that's very sustainable. So I say we will be back in the office sooner rather than later to a degree more than what people are imagining at this moment.

BRIAN SOZZI: Rich, we very easily could get a Fed taper soon that goes on to push interest rates higher. How will that impact the fundamentals of these highly leveraged REIT companies?

RICH ANDERSON: Well, I wouldn't call them highly leveraged REIT companies. In fact, I'd call the REITs-- the balance sheets to be quite strong. The concern about interest rates is more, in my mind, about the dividend component of the REIT vehicle. And so as interest rates rise, the value of the dividend yield goes down.

And so there will, be if that were to happen, some type of hiccup, depending on the asset class. There are asset classes like multifamily that rely less on the dividend yield and more on a total return story, whereas other asset classes like health care and net lease are very much income vehicles and less about a total return sort of story about reinvesting into the businesses.

And so back in 2013 when we had the taper tantrum, the health care REITs and the net lease REITs wildly underperformed, and others did not do so badly. I would expect a similar reaction this time around to the extent, as you describe, something like that happens.

JULIE HYMAN: And Rich, you touched on multifamily. And the last time you were on with us last year, you talked about how you thought multifamily would recover. It did end up recovering. So what happens now for multifamily?

RICH ANDERSON: It's funny. The hybrid office model is really a great thing for multifamily. And you're right, we were down 30%, 40% last year when we spoke. And we were pushing multifamily. And those stocks are up this year 40%-plus.

So the call has worked. The question is what kind of sustainability do we have on that call. And we think it's going to continue. One reason is because of hybrid office. Now no longer, you can't move from New York to Nebraska and still have a job. You've got to be close to the office if a hybrid model is intact. So that means people moving back closer to the cities. And that should be good for the multifamily business.

Likewise, universities opening back up, also disproportionately benefiting gateway markets. And so I think the hybrid office model, however it works out for the office business longer-term, we shall see. It's certainly a good thing for the multifamily business.

MYLES UDLAND: All right, we'll leave it there. Rich Andersaon, senior analyst with SMBC Nikko Securities. Rich, appreciate the time this morning.

Advertisement