REITs’ Spotty Q2 Metrics Don’t Predict Q3 and Q4
The first few reports in REITs’ second-quarter earnings season have come out, and by and large they’re in line with the predictions of Calvin Schnure, SVP for research and economic analysis at Nareit. Writing ahead of the first Q2 earnings reports—more will be issued as July winds down and August begins—Schnure noted that year-over-year declines in funds from operations and rising vacancies are expected in some sectors, due to the impact of stay-at-home orders on business sales and employment.
However, he noted, “due to the highly unusual nature of this recession, uncertainty about the path of the pandemic, and the potential for a robust recovery, in upcoming earnings announcements the management’s view of market conditions and discussion of the outlook are likely to attract at least as much attention as FFO.”
Even if there is no “V”-shaped recovery, Schnure wrote, activity may well recover more quickly than in past recessions, “at least during the initial stages as stores reopen and employees return to work.”
He noted that recent reports on employment, retail sales, housing starts, home sales, and industrial production have shown large gains in May and June from the troughs in April.
The economic impact of the shutdowns was heavily concentrated in the service sectors, and many parts of real estate other than hospitality and retail didn’t close down to the same extent, observed Schnure.
Additionally, “the suddenness of the shutdown and the expectation that it would be temporary (although recent news suggests it could be somewhat less temporary in some regions) means that many tenants continued paying rents even as their receipts stopped flowing.”
Last but not least, Schnure noted that the rebound in retail sales actually does suggest a V-shaped recovery, and he reiterated that other business activity has come back strongly from the low points reached in the middle of Q2.
As Q2 unfolds, “the various property sectors will almost certainly report dramatically different results,” wrote Schnure. “For example, lodging/resorts and regional malls have had some of the most significant losses of revenues during the shutdown, which will likely be reflected in FFO.
“On the other hand, the sectors that support e-commerce and the digital economy—industrial, data center and infrastructure REITs—have been relatively unscathed by the crisis,” he continued. “This suggests any sharp declines in earnings during the second quarter may be followed by partial recovery in the third and fourth quarters.”
For comments, questions or concerns, please contact Paul Bubny
- ◦Economy
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