The stock market is still riding high. So why are real estate stocks tanking?

Analysts are pointing to rising rates and oversupply

(Credit: iStock and Pixabay)
(Credit: iStock and Pixabay)

Even a record-high stock market can’t cheer up real estate investors.

The Dow Jones saw a winning streak earlier this month. And the economy, broadly, is strengthening, with the unemployment rate falling to the lowest level since 1969. But real estate stocks across the board have been sliding downhill over the last year.

“We are definitely in a soft market and it will continue to soften next year,” said Carter Trent, a research associate at Stephens Inc.

Some companies, of course, are faring far worse than others. Residential giant Realogy is down more than 40 percent since a year ago. Discount brokerages Redfin and Purplebricks have tumbled 31 percent and 41 percent, respectively. On the other hand, Vornado Realty Trust has fallen less than 10 percent and CBRE is down less than 1 percent.

Across the spectrum, sentiment is bleak. By contrast, the S&P 500 has climbed more than 7 percent.

“I think, at the end of the day, it’s really due to rates,” said BMO Capital Markets’ John Kim.

As the Federal Reserve has increased rates, it’s added to concerns over property capitalization and valuations.

Plus, there’s the question of supply in some markets. More than 27.4 million square feet of new space has come online, with another 36 million square feet slated through the end of 2018, according to JLL’s second quarter U.S. Office Outlook. Another influx, of 57.4 million square feet, is expected next year. At the same time: 34.5 percent of the space remains available.

During the same quarter, new supply outpaced demand in the multifamily market, too. If inventory comes down while the economy remains strong, that could help investor perception, Kim said.

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Residential portals and brokerages are grappling with their own set of challenges. Macro trends like interest rates and affordability issues have made for a tough market. Sales of previously owned homes in the U.S. dipped 3.4 percent in September, compared with a year earlier, indicating a continuation of the housing market slowdown.

Reports earlier this year noted that home prices were the least affordable since 2008. Climbing construction costs aren’t helping — nor are the higher borrowing costs.

So what’s a sector in a slump to do? Particularly since macro factors rarely change overnight. For now, analysts and investors are looking to the upcoming round of company earnings for guidance as next year approaches.

REITs, for example, have seen slower growth, noted Adam Goldfarb, managing director at Sandler O’Neill, in a research report.

Some sectors of real estate, however, have already seen a boost in sentiment. After a selloff at the beginning of the year, shares of hotel REITs recovered — driven by stronger fundamentals in the hotel market and increased M&A chatter.

O’Neill said that the upcoming earnings calls “should be a time for managements to discuss how they and their boards plan to grow or otherwise maximize shareholders’ ownership stakes.” If companies “can’t reasonably foresee growth,” he added, they should consider management changes or a sale.

While more consolidation is expected, real estate has already seen a pick-up in M&A activity. Deals among real estate firms hit $524.7 billion last year — nearly 25 percent more than the 2007 record of $424.5 billion, according to Thomson Reuters.

And others may be in the pipeline. Colorado-based Real Trends previously told The Real Deal that it’s handling double the valuation work from two years ago. The firm, which valued 200 brokerages in 2017, is on track to value 270 this year.

For companies like Realogy and Zillow, Trent said, it’s worth examining how some of the newer initiatives are playing out. Zillow, in particular, has its “iBuyer” service and has implemented changes to its Premier Agent program, which will now screen leads before passing them on to agents. Those pivots and additional streams could be significant going forward.

“These stocks have been hit so hard and gotten cheap,” he said. “You can only go up from here.”

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