Nareit’s Schnure Views CRE Market With Optimism

Following Nareit’s 2021 REITWeek event, Calvin Schnure, Senior Vice President of Research and Economic Analysis, spoke with Matrix Senior Research Analyst Ben Bruckner about the outlook for inflation and the current macroeconomic environment, as they relate to real estate and REITs. 

“We are entering a period of strong economic growth with above-average price increases, but much of that is getting back from very weak pricing a year ago,” Schnure observed. While there have been “sporadic instances” of very large price increases during the past month or two due to short-term bottlenecks—the Consumer Price Index increased at an annualized 4.2 percent in April and 5.0 percent in May—he does not view it as a rise in the overall price level.

Further, Schnure noted sporadic price increases are consistent with an expanding economy, and other macroeconomic measures point to a period of sustainable growth. “It tells you this is a market that needs more supply,” he said, pointing to the fact that industrial production is four percentage points below its long-run average and seeing incentive for ramped-up production.  “We don’t have an aggregate problem.” 

An economy that has still not fully recovered from the pandemic has positive implications for all types of real estate. “The economy can continue to expand at an above-trend pace through this year and into next year. That means demand for all types of commercial real estate. Most types of real estate really benefit from basic macro fundamentals: GDP growth, employment, consumer spending, industrial production.  Those are all on an uptrend. This will be really good for real estate,” he predicted.

Even in a moderately higher-inflation environment, Schnure noted a final reason to be optimistic about real estate and REIT prospects:  a growing economy with room to expand coupled with a fundamentally sound industry pre-pandemic, lacking the weaknesses in real estate fundamentals that typically trigger a downturn.

“Usually downturns are preceded by overbuilding, frothy pricing and excessive leverage. We did not have any of those three things at the beginning of the pandemic, and that’s one reason why the market has been resilient,” he said. Rather than internal weakness, the market “took a blow from an external shock. It’s healing from that blow, and it leaves it on solid ground for the future.” 

Pandemic Recovery

Conference speakers across all asset types were similarly optimistic about near-term growth prospects as the economy rapidly recovers from the pandemic. Anomalously high April and May inflation numbers were widely considered transitory, with the REIT industry well positioned to benefit as the economy recovers.

Even executives in the hard-hit hospitality sector reported recovery due to strong leisure travel demand.  Edward Pitoniak, CEO for Vici Properties, pointed to his largest tenant, Ceasars in Las Vegas, with 23,000 rooms to rent per night, achieving 84 percent occupancy in April. And Leslie Hale, president & CEO of RLJ Lodging Trust, said she has seen hospitality return to positive cashflow thanks to strong leisure demand and expects business travel to pick up after Labor Day. However, with group lodging demand also still below pre-pandemic levels, she doesn’t see a full recovery before 2023.    

Infrastructure REITs saw increased demand for their services during the pandemic and do not expect that trend to reverse. During the pandemic, consumers “experienced better connections, lower latency and most important, better services,” noted Marc Ganzi, president & CEO at DigitalBridge (formerly Colony Capital). “I don’t think consumers will accept going back to not having those services.”