What Shutdowns Mean for Real Estate Investing

Goldman Sachs Real Estate Overview

• The firm invests in listed real estate via Real Estate Investment Trusts (REITs).
• The REIT industry currently holds a market capitalization of approximately $950 billion.
• Total enterprise value for the sector stands at roughly $1.4 trillion.

Subsector Performance and Market Dislocation

• Hardest Hit (Approx. 20% of market): Retail, hotels, and senior living facilities directly impacted by economic closures.
• Resilient (Approx. 45% of market): Office, residential, and self-storage assets are currently performing "okay," though long-term viability depends on future employment trends and consumer migration patterns.
• Beneficiaries (Approx. 35% of market): Data centers, cell phone towers, industrial, and logistics real estate have seen stocks rise year-to-date due to increased demand.
  • Demand Drivers: Zoom's daily users surged from 10 million to 200 million; Netflix added 16 million subscribers; increased telemedicine usage requires higher bandwidth and data center capacity.

Commercial Rent Collection Dynamics

• Rent collection remains the central challenge as closed businesses lack revenue to cover taxes, utilities, and interest.
• A divergence in tenant behavior is emerging ("tale of two cities"):
  • Struggling sectors like movie theaters are largely not paying rent.
  • Many restaurants and essential businesses continue to pay full rent.
• Legal disputes regarding rent negotiations are anticipated.
• There is hope that stimulus funds functioning as grants for businesses retaining labor will be allocated toward rent payments.

Residential Housing Market

• The market entered the pandemic in the strongest spring season in over a decade, characterized by low inventory (3–4 months) and rising wages.
• Current Headwinds: Despite historic low mortgage rates, the market is constrained by tighter credit availability.
  • Required FICO scores have increased.
  • Loan-to-value ratios offered by lenders have decreased.
• Federal Intervention: The Fed's participation in the conforming mortgage-backed bond market may expand the risk spectrum.
• Forward Outlook: Activity may improve in the non-conforming (jumbo) market as stimulus measures increase, pending how mortgage underwriters manage higher default risks.

Impact of Monetary and Fiscal Stimulus

• Rapid legislative action and increasing stimulus levels have been undoubted positives for the REIT sector.
• REIT market equity is up approximately 27 percent from its recent bottom, showing a direct correlation with stimulus levels.
• Long-term Risks:
  • The long-term impact on inflation and interest rates remains an unknown variable.
  • Behavioral shifts regarding Central Business Districts (CBDs) and residential living patterns are difficult to extrapolate from current pandemic conditions.
  • Future real estate performance depends on how the current economic stimulus is "squared away" in the broader economic ledger.