Final month was a brutal one for traders. The inventory market took a tumble as inflation fears brought about traders to develop involved that rates of interest might rise sharply in 2022. Whereas tech shares felt the brunt of the impression — the tech-heavy Nasdaq Composite Index plunged 10% in January — actual property shares additionally tumbled, with the Actual Property Choose Sector Index falling 8% final month.
The sell-off was widespread throughout the true property sector. Homebuilding shares plummeted 15%, whereas actual property funding trusts (REITs) had been down by about 7%. This is a take a look at whether or not there’s extra draw back forward or if actual property shares can stage a comeback in 2022.
Headwinds are beginning to impression actual property shares
Homebuilders obtained off to a tough begin in 2022. Ongoing provide chain points are making it arduous to get supplies, which, together with persistent labor shortages, is driving up development prices and timelines. That is placing stress on homebuilder margins. On prime of that, the potential for greater rates of interest this 12 months to assist tame inflation would drive up mortgage charges. That might make it much more costly to purchase a house, doubtlessly dampening demand. These headwinds might plague homebuilders this 12 months, which is why their inventory costs tumbled final month.
In the meantime, greater rates of interest will make it costlier for REITs to borrow cash to finance their operations. On prime of that, greater rates of interest improve the earnings yield on lower-risk investments like authorities bonds. That tends to overwhelm REIT inventory costs, pushing up their dividend yields to compensate traders for his or her greater danger profiles.
As well as, REITs are experiencing another headwinds. For instance, workplace REITs fell 6% final month attributable to considerations that firms would additional delay their return to the workplace because the omicron variant brought about resurgent case counts.
In the meantime, the sell-off within the know-how sector weighed on knowledge heart REITs and infrastructure REITs, which each tumbled greater than 13% final month. With tech shares plunging, traders began worrying concerning the sector’s progress prospects and whether or not it might impression demand for data-related infrastructure.
A bump within the highway, or an indication of issues to return?
Whereas the true property business is dealing with a number of headwinds this 12 months, that does not imply traders ought to write the sector off for 2022. A number of leaders throughout the true property sector have just lately offered their outlooks for 2022. These preliminary forecasts counsel the business can navigate its present challenges.
In early February, main homebuilder D.R. Horton (DHI 3.48%) reported its fiscal first-quarter outcomes. CEO David Auld said on the first-quarter convention name that the corporate “delivered an impressive first quarter, highlighted by a 48% improve in earnings.” Of notice, its pre-tax margin improved to 21.2% within the interval, suggesting that it is navigating the availability chain headwinds.
In the meantime, the homebuilder gave some optimistic steering. Auld said on the decision that “even with the current rise in mortgage charges, housing market situations stay very sturdy.” He famous that whereas the corporate is dealing with important provide chain challenges, January house begins and web gross sales orders had been according to its targets. Due to that, it expects to ship double-digit quantity progress this 12 months.
Likewise, a number of main REITs just lately reported sturdy outcomes and offered optimistic outlooks. For instance, main workplace REIT Boston Properties (BXP 1.89%) posted stable fourth-quarter leads to late January, suggesting workplace demand has come roaring again. The corporate famous that company purchasers are more and more dissatisfied with distant work as a result of it is impacting effectivity, retention, and tradition. Due to that, firms plan to return to the workplace this 12 months, which is driving sturdy leasing throughout Boston Properties’ portfolio.
Manhattan’s largest workplace landlord, SL Inexperienced Realty (SLG 1.70%), additionally just lately reported its outcomes. These numbers counsel that the New York Metropolis workplace market is beginning to get again on its toes. SL Inexperienced’s leasing was higher than anticipated final 12 months, at 1.9 million sq. toes. Given the restoration of New York Metropolis and its present leasing pipeline, SL Inexperienced set an formidable purpose to lease greater than 2 million sq. toes this 12 months.
Even demand for knowledge infrastructure has remained sturdy regardless of investor worries final month. Main communications knowledge infrastructure REIT Crown Fort Worldwide (CCI -0.62%) posted sturdy fourth-quarter outcomes on the finish of the month. Cell carriers are investing closely to roll out their sooner 5G networks, driving demand for communications infrastructure. Due to that, Crown Fort barely boosted its 2022 steering final month whereas noting that it sees an acceleration in small-cell website deliveries coming in 2023 to help the continued roll-out of 5G.
Down, however not out
Actual property shares bought off final month as traders grew nervous concerning the impression of rising rates of interest. Nevertheless, to this point, actual property firms stay optimistic that they’ll proceed to navigate the sector’s headwinds in 2022. That means the business might rebound within the coming months, which is why traders would possibly need to take a more in-depth take a look at actual property shares that bought off final month.