Your browser does not support JavaScript! Pls enable JavaScript and try again.

Economy | Equities

Which Real Estate Booms Could Continue?

Posted on

Prospective US homebuyers report a record level of uncertainty over where they might choose to live. A low level of home inventories and escalating prices likely drives some of this.  Importantly, Citi analysts see great public uncertainty over the flexibility of work arrangements and future commutes.

 

Work from home” flexibility has meant a boom in single-family suburban housing and a 60% jump in US homebuilder shares since end 2019. Urban rents in the largest cities have fallen and related asset prices have had a meager rebound. This dichotomy could be sustained. However, fundamentals and valuations are at risk if employers demand a return to a five-day urban work week.

 

Telecommuting carries risks such as cyber-security threats and broader social concerns. On the positive side for economic potential, it opens opportunities for a larger work force to include those with care-giving needs and the disabled. Commuting time and energy (including fuel) is, by definition, a frictional input cost to the economy.

 

 

Implications for Equities

Both homebuilders and apartment REITS have had solid recoveries since last April, but apartment REITS have lagged the homebuilders by about 65 percentage points. Looking purely at rental assets, apartment REITS have lagged single-family rental REITS by 25 percentage points since end 2019.

 

Citi analysts believe a sharp “U-turn” to a five-day urban office commute for most workers could harm homebuilder shares and soften existing suburban housing markets. But that appears unlikely. Allowing for a couple days of flexibility could make a long commute more bearable, increasing the value of housing assets at greater distances from urban centers.

 

Taking all these factors into consideration, Citi analysts believe that homebuilder shares have achieved much of their gains with some upside for those that can accelerate and sustain higher new home construction levels. Citi analysts believe that office REITS may see limitations on their recovery depending on the nature of their properties and locations.

 

There are many uncertainties regarding the durability of COVID-19 impacted real estate trends. While overweight Real Estate since June 2020, Citi analysts believe overall assets have appreciated (recovered) too much for all sectors to offer strong returns from here.

Related Articles