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Will U.S. REITs Feel the Impact of the Coronavirus Outbreak?

Chinese travelers and materials suppliers play a role in demand for U.S. hotels and the speed of U.S. project deliveries.

As the China-born coronavirus outbreak continues to spread and claim more lives, commercial real estate professionals are pondering how the epidemic might affect publicly-traded U.S. REITs. There’s no firm consensus, so far, about the outbreak’s potential impact on the sector.

Overall, the U.S. stock market keeps percolating amid the coronavirus epidemic. “With the risks of a domestic epidemic from the coronavirus well contained, we expect economic growth to gradually re-accelerate over the course of 2020,” Michael Pearce, senior U.S. economist at London-based economic research firm Capital Economics, wrote in a research note.

Marty Fridson, chief investment officer at New York City-based investment firm Lehmann Livian Fridson Advisors LLC, says that based on evidence from previous disease outbreaks, he doesn’t foresee the coronavirus threat driving down the prices of REIT stocks, “unless the crisis becomes so severe that the stock market as a whole drops very sharply.”

However, REIT stock prices probably would decline if the S&P 500 were to drop by, say, 10 percent, in response to the epidemic, Fridson says.

“In other words, the REITs would be falling in sympathy with other stocks, not because they were directly affected in some major way by the coronavirus,” he notes.

Data generated by stock brokerage giant Charles Schwab shows that on average, one-month global market returns edged up 0.44 percent following 13 major disease outbreaks dating back to 1981. Average three-month market returns totaled 3.08 percent, according to Charles Schwab, while average six-month market returns climbed to 8.5 percent.

Figures such as those cited by Charles Schwab suggest that one of the REIT sectors perceived as being most threatened by the coronavirus outbreak—the hotel sector—won’t feel a significant impact from the epidemic, according to REIT analyst Lukas Hartwich, head of the lodging and health care sectors at Green Street Advisors Inc., a real estate research and advisory firm in Newport Beach, Calif. That perceived risk stems from the possibility that U.S. hotels could see a dip in bookings by Asian travelers.

In the short run, hotel REITs might experience some headline-driven selling pressure, but that should “pretty quickly” reverse itself, Hartwich says.

“The reality is, we don’t know. Every [disease outbreak] is different, and maybe this will be the one where there’s a huge impact,” he notes. “I don’t think that’s the most likely scenario, but that’s certainly an outcome that can occur.”

“I know the headlines are scary,” he adds. “I think people’s knee-jerk reaction is always that this is going to be way worse than it ultimately is.”

China accounts for about 3 percent or 4 percent of international travelers coming to the U.S., Hartwich notes, and international travel as a whole represents 5 percent to 10 percent of U.S. hotel demand.

Jeff Holzmann, CEO of New York City-based real estate asset manager IIRR Management Services LLC, says the coronavirus outbreak will harm at least some publicly-traded REITs. He attributes that, in part, to the coronavirus-propelled pullback in Asian business travel, including temporary cancellation of some U.S.-Asia airline routes.

In a Feb. 4 post about the coronavirus epidemic, S&P Global Market Intelligence notes that hotel brands such as Marriott and Hilton and hotel REITs like Host Hotels & Resorts Inc. and Park Hotels & Resorts Inc. are “typically sensitive to changes in business sentiment,” since corporate travel represents a sizable share of hotel bookings.

“The chain reaction caused by the coronavirus will trickle down to the global economy and, by extension, to publicly-traded REITs very quickly. Lack of travel and interruptions to aviation cause a slowdown across all business dealings,” Holzmann says.

Holzmann also envisions some REIT construction projects facing costly slowdowns due to holdups in supply deliveries from Asia, particularly China.

“While the occupancy rates of a multifamily project in Texas might not be directly impacted by an epidemic in Asia, the bigger picture plan, progress and financials of a large real estate builder and operator will change almost immediately,” he says.

This could be an especially big blow to REITs that build office buildings and warehouses vs. REITs that build residential projects, according to Holzmann. That’s because China tends to be a bigger source of materials for office buildings and warehouses than for residential projects, he says.

“It would be logical to assume that REITs that are building on the West Coast of the U.S. or in the Asia Pacific region will be subject to more disruption, given that the health crisis’ epicenter in Asia would affect the transport of manpower and materials originating in that location first,” Holzmann says.

In a Feb. 4 post, Brett Owens, chief investment strategist at investing website Contrarian Outlook, offers a much different viewpoint. Owens argues that U.S. REITs should be able to withstand the coronavirus turbulence because they focus mostly on U.S. properties. This makes U.S. REITs “a good way to insulate your portfolio from whatever happens abroad,” including trade wars, Middle East conflicts and virus outbreaks, Owens writes.

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