JPMorgan Chase & Co. Presents at Nareit’s REITworld: 2020 Annual Conference, Nov-17-2020 10:15 AM - NYSE:JPM

NYSE:JPM

Calvin Schnure, the SVP of Research & Economic Analysis at the National Association of Real Estate Investment Trusts (NAREIT), provided insights on the macroeconomic backdrop and its impact on Real Estate Investment Trusts (REITs). Here’s a detailed summary of his key points:

Macro-Economic Backdrop

• Recovery Shape: Contrary to a V-shaped recovery, the economy experienced a significant drop followed by a rebound, but not reaching pre-pandemic levels. The economy remains about 3% below where it was a year ago.
• Two-Track Recovery: The recovery has been uneven, with sectors like travel, lodging, and restaurants heavily impacted and still depressed. Other sectors have fared better.
• Importance of Controlling the Pandemic: Full economic recovery, including in real estate, depends on bringing the pandemic under control.

Real Estate Sector Insights

• Office Sector:
  • Work-from-home trends have exceeded expectations but will not lead to permanent work from home for all.
  • Office demand will be impacted, with estimated reductions ranging from 2% to 20% over the next few years.
  • Densification trends are reversing due to health and safety concerns, potentially benefiting the office sector.
• Retail Sector:
  • Brick-and-mortar retail sales have continued to grow, albeit at a slower pace, supporting the need for physical stores.
  • E-commerce sales have surged but have not declined as brick-and-mortar sales recovered, suggesting a lifted path for e-commerce.
  • Data centers, logistics, and cell towers are expected to see strong growth.
• Healthcare Sector:
  • Healthcare demand, particularly in seniors housing, will likely rebound with successful vaccine distribution.
  • Long-term demographics support a robust recovery in healthcare real estate.

Future Outlook

• Cautious Optimism: The economy is cautiously optimistic for 2021, with some sectors recovering more quickly than others.
• Work-from-Home Trends: Work-from-home will remain a tool but not eliminate the need for office space.
• Recovery Timeline: Full recovery for some sectors, like hotels and lodging, may take longer due to reduced travel volumes and changes in business travel habits.

ESG and Sustainability

• ESG as a Business Function: ESG has become a fundamental business function for most corporations, driven by investor interest.
• European Model: The U.S. can learn from Europe's experience in ESG implementation.
• NAREIT’s Role: NAREIT provides resources and information on ESG practices for the REIT community.
• No Trade-Off: Implementing ESG practices can save costs and improve efficiency, offering a net positive for businesses.

Summary

Calvin Schnure’s insights emphasize the uneven recovery across sectors, the resilience of certain real estate segments, and the importance of controlling the pandemic for a full economic recovery. He also highlights the growing importance of ESG practices in the real estate industry.

**- REITs entered the pandemic with much lower leverage compared to the Financial Crisis, typically in the 25% to 35% range.

• In 2019, there was record issuance of refinancing, which helped REITs address their 2020 and 2021 maturities.

• Despite expectations, REIT issuance for 2020 is likely to end up close to 2019 levels, around $36 billion to $37 billion.

• The pandemic led to more issuance than initially expected due to the need for emergency liquidity.

• REITs initially lagged in reacting to the pandemic, but when they did, credit spreads widened significantly.

• REIT credit spreads have not fully recovered to pre-pandemic levels, making REITs potentially attractive from a credit perspective.

• The first equity REIT bankruptcy in 27 years (CBL) highlights the challenges faced by leveraged mall REITs.

• Mall asset values are highly uncertain, with potential declines ranging from 35% to 75%.

• Data centers and cell towers, considered new economy sectors, have benefited from the pandemic and have strong demand drivers.

• Some REITs, like Equinix, avoid issuing bonds with typical REIT covenants.

• Most large REITs have moved towards unencumbered balance sheets, finding capital markets more accessible and stable.

• Green bonds have started to show a pricing benefit, and more REITs are expected to issue green bonds in 2021.

• The triple-net lease REITs sector offers good value due to its resilience and potential for recovery post-vaccine.

• Healthcare REITs, particularly senior housing, have been beaten down but have strong long-term demographic tailwinds.**