Quarterly Overview and Outlook
The US REIT market continues to show a wide dispersion in returns by sector. The industrial sector continues to lead the pack, supported by strong demand from tenants, especially in e-commerce, and limited new supply. This sector keeps extending its upward cycle which could continue into 2018. Self-storage also saw a nice bounce following a disappointing first half of 2017. While the impact of recent hurricanes on human lives cannot be minimized, these events have translated into an increased need for temporary storage. The US retail sector, for its part, recorded another down quarter. Sentiment still remains mostly negative but we are seeing a slight improvement at the retailer level. The pace of store closings has slowed down materially, and recent sales numbers were better than expected for many retailers. The apparel segment remains under pressure and mall landlords are reducing the square footage dedicated to these tenants in order to add more dining and entertainment concepts and improve the shopping experience in their centers. A recent transaction in the mall sector points to asset values that are higher than where stocks are currently trading, but it appears that more pricing evidence will be needed to convince the proponents of the “end of the mall” scenario. The healthcare sector also recorded a difficult quarter. While we have discussed increasing supply in senior housing in prior material, we note that supply is still quite high, although most recent data shows it may have peaked. The obvious impact is pressure on occupancy and the challenge is properly identifying how long these new units will take to stabilize (potentially 1 to 2 years) and which submarkets are likely to suffer. This highlights the importance of understanding the local dynamics of real estate and doing proper underwriting.
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