Kristopher Dickson
Head of Real Estate Corporate
& Investment Banking Group
Truist Securities
Inflation is expected to remain elevated for the near-term, particularly in light of the impact that the Russia invasion of Ukraine is having on already-high energy prices. We will likely see CPI moderate later this year as supply chain issues and wage pressures abate.
REITs have historically performed well in inflationary environments where there is a growing economy and are likewise well-positioned this time around. Industry fundamentals are strong, and balance sheets are healthy with most near-term debt maturities having already been refinanced amidst recent attractive debt capital markets conditions. However, there are a lot of uncertainties. Chief amongst them is whether the Fed can achieve its inflation objectives via upcoming rate increases with a “soft landing” versus a recession. It also bears watching to see if there is any upward movement in cap rates or whether the significant cash on the sidelines continues to keep them at historically low levels.”
Scott Eisen
Head of North American Real Estate
Citi
Citibank economists are calling for a year-end CPI index rate at around 6%, which is a modest decline in recent months, but clearly a CPI rate that is well above where we’ve been the last few years.
Where REITs will get long-term financing relative to a 10-year Treasury is one of the most important impacts. Our economists are calling for a year-end 10-year Treasury of around 2.5%. The bear case has 10 years in well excess of 3%, which is looking even more likely given the current inflationary environment.
The second impact on REITs will be the war in Ukraine and the global results. We continue to have very significant volatility in the equity markets, as people are uncertain as to what will happen on the European front. Higher volatility as a result of uncertainty around the war in Ukraine can clearly impact REIT equity pricing, and REIT access to equity capital.”
Stephan Richford
U.S. Group Head,
North American Real Estate
BMO Capital Markets
While upward interest rate moves by the Federal Reserve will likely cause near-term volatility, we expect inflation to be a persistent theme through 2022 given that some of the root causes are not likely to change quickly. In the near-term, it is challenging to see supply chain issues, due to COVID lockdowns in China, and supply/demand imbalances correct swiftly enough to slow inflation, though headline numbers could taper as we get closer to year-end 2022.
Given rising interest rates and inflation, we will be closely watching the impact on REIT equity values due to rising rates. Historically, real estate investors look toward shorter-term leases like hotels, apartments, and storage in these environments. However, there are big secular trends also driving demand and ultimately inflation, with the data center sector and the industrial asset class as great examples.”