What's the Latest with the Commercial Real Estate Market
December 9, 2020
Here's the newest edition of our continuing series on What's the Latest with the Commercial Real Estate Market.
To dive deeper into the state of the commercial real estate market and the economy here and abroad, keep on reading. (We have graphs!) Interested in watching a video on these market updates? Click here for our YouTube Channel.
TL;DR - As seems to be the common these since the start of the coronavirus, some sectors are getting by just fine while others are barely hanging on.
Part I: Dodge Momentum Index
The Momentum Index, issued by Dodge Data & Analytics, is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. Essentially, this index predicts the future of the real estate development industry by analyzing permitting data.
From the chart above, the index dropped 1.8% in October to 127.5. The commercial component of the Momentum Index lost 4.4% over the month, but the institutional component gained 3.3%. According to Bill McBride at Calculated Risk, "the Momentum Index has struggled to make consistent gains since passing its post-pandemic low in June. Economic growth has slowed over the past few months, creating weaker demand for commercial projects. The fear about a new wave of COVID-19 infections may also be impeding planning activity in consumer-focused projects such as hotels and retail, although planning for warehouse projects continues to impress. Even with this month’s gain, the institutional component of the Momentum Index remains well below levels seen prior to the pandemic as state and local entities come to grips with the widening budget chasm."
Part II: REITs for The Win
One of the biggest drawbacks to investments in commercial real estate is the illiquidity of that asset. REITs can compensate for this weakness, and helps understand how commercial real estate assets would trade as if they were a stock.
From the chart above from S&P, the manufactured homes sector led all publicly traded U.S. equity REIT sectors in terms of the funds from operations multiple for the last 12 months (LTM FFO). This index is similar to an EPS graph for publicly traded stocks. The industrial and hotel REIT sectors followed next, and closed out with the retail enclosed mall sector.
Part III: Florida's Exports
Florida's largest industry is the tourism and hospitality industry. Florida is one of the top destinations in the world when it comes to travel and leisure time and dollars spent. Unfortunately, this sector is one of the hardest hit sectors of the economy since the start of the coronavirus pandemic. Fortunately, Florida does have a not-so-insignificant trade relationship with countries around the world.
From the chart above from the Census Bureau, we can see that through the month of September, the state of Florida accounted for about 3.2% of all of the United States's trade exports. While states like California, Texas, Louisiana, and Ohio continually outshine the Sunshine State in terms of exports, Florida's diversity in its business sectors is helping the state weather the coronavirus pandemic better than some other higher export producing states.
Here's to the Fundamentals.