The Stock Market and CRE

There are many facets to this issue. First is the interest rate impact on REIT stock prices, and the negative impact they have as rates rise. While rates were near zero, REITs were a good place for investors to stash funds on which they could get both a current return with reasonable safety, but also an increase in valuation as real estate generally returned to favor and profitability. For several years it was a winning place to be. Now the REIT sector has to compete with bonds for returns on a current basis and, with CRE generally fully priced, and possibly going into slight decline, there is little incentive for investors to be in REIT shares. This is likely to just remain the same or deteriorate over the next two or three years as the ten year rises over 3% and eventually possibly over 4%. For REITs, it just makes it much harder to raise new capital and to grow the portfolio.

The private REIT market will be suffering the same issues as the public REITs. C Corp CRE companies will also have issues with rising rates making it more difficult to justify new capital raises and growth to the same degree it had been running. Operating companies may find it harder from here to raise rents, and to keep operating expenses low. This is especially true for hotels where labor costs make up as much as 80% of total expenses in many cases. Occupancy has topped out in most markets and ADR is barely rising at 2%, while costs are rising faster. This spread will worsen as the labor shortages get worse as time goes on, and as more supply enters the market. It will be further worsened as immigration is tightened and the labor pool for housekeepers and other low skill workers is tightened. As CRE values decline with the rise in rates and a general lack of new opportunities for value add acquisitions, it will be harder for many C Corps to maintain sufficient growth to keep their share prices increasing.