Posted on GlobeSt.com | February 27, 2019
Industrial, manufactured housing and cold storage sectors poised to outperform expectations.
MADISON, NJ—Even with political uncertainty in Europe, the potential for U.S. monetary policy missteps and threats of an escalation in the trade war, PGIM’s Rick Romano anticipates 2019 will be a favorable year for the U.S. REIT market.
According to Romano, industrial, manufactured housing and cold storage sectors are poised to outperform expectations in 2019. Each of these sectors should see REITs leading cash flow growth and they will even have the opportunity for upward earnings revisions during the year.
The industrial sector continues to benefit from e-commerce-driven demand particularly in the last mile of distribution. Additionally, institutional capital continues to be focused on industrial which should prevent cap rates from expanding.
“We continue to monitor supply but with the exception of a few markets we continue to see a landlord’s market for pricing power,” says Rick Romano, head of Global Real Estate Securities at PGIM Real Estate.
As more institutions recognize it as an investable property type, manufactured housing continues to benefit from institutional capital flow. Due to the affordability and the age-restricted focus of the property, demand for manufactured housing remains defensive. It is also difficult to add supply which remains very constrained. Additionally, operating margins remain higher than traditional multifamily, and there is an opportunity for the public REITs to continue to consolidate the space, Romano tells GlobeSt.com.
Cold storage is very attractively priced in the public markets relative to private market transactions and more institutional capital is being drawn into the sector, which may result in a cap rate compression. Cold storage benefits from a needs-based defensive demand (food storage). The potential for further grocer e-commerce penetration, which still has to come into its full potential, will further drive demand. Additionally, the property type’s ownership is very fragmented leading to consolidation opportunities to drive external growth.
“The storage market is currently at the peak of a supply cycle. Starting in 2016, the sector saw a dramatic increase in new supply averaging roughly 5-8% of existing stock annually over the last 3 years,” says Romano.
Senior housing has also suffered from above-average supply additions over the last several years. Unlike storage however, the construction pipeline is clearly moderating – now representing 6% of existing stock – down from 7% in 2016-2017. That said, 6% is still a high number and most healthcare REITs are expecting negative SS NOI growth in 2019.
“In addition to a competitive supply, senior housing operators face constant pressure from rising labor costs which represent roughly 60% of total expenses,” says Romano.
On the positive side, the demographic demand wave from the aging population in the United States is undeniable and should really kick into gear in 2020 and beyond. So while 2019 is likely to remain a tough year for the sector in the public markets, the set-up looks highly favorable over the long-term.
According to Romano, REITs should continue posting stable operating fundamentals with 2-3% same-store NOI growth resulting in 5% – 7% cash flow and dividend growth over the next 12 months, explains Romano. That said, performance will vary among property types with industrial likely to see the best NOI growth at over 4%, while retail and storage is likely to be on the lower side at 1-2%.