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Quarter-End Insights

Real Estate: Strong Fundamentals Persist--As Do Opportunities

REITs should have several more years of solid growth in property fundamentals as the economic cycle continues and many sectors have the peak in supply growth behind them.

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  • Morningstar's real estate coverage appears fairly valued at current levels. It is currently trading at a market-cap weighted, price/fair value estimate of 0.98, only a 2% discount to what we believe the stocks in the sector are worth.
      • We view themes in commercial real estate as generally defensive in nature, with lingering concerns about increasing bond yields associated with future rate hikes.
    • Despite these concerns, we continue to focus on underlying performance, which has remained healthy overall, as REITs have been focused on repositioning and strengthening their portfolios, deleveraging, and capital recycling.
    • Construction of new property continues as firms look for higher returns, though supply may have peaked in many markets and sectors. Rising construction costs may lead to slowing supply growth over the next few years.
    • At current price levels, we see attractive investment opportunities scattered across various asset classes within our REIT coverage.

    U.S. Real Estate Outlook
    Contributed by Kevin Brown

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    Kevin Brown does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.