Morningstar’s REIT Outlook

This Morningstar video does a great job of summarizing the current investment environment for REIT stocks. It was produced on October 28, 2008, but it will be relevant (and worth watching) well into 2011.

The video concisely reviews the salient risks around all REIT property groups: landlords are facing weaker occupancies and lower rent growth due to the weakening economy, at the same time that supply in some markets (particularly hotel and retail) will be increasing. In addition, many REITs are also carrying unsustainable debt levels associated with higher LTV lending at a time when property values were inflated, all of which will be difficult to refinance. This will undoubtedly impact REIT Dividends.

One aspect of the equation that is missing from this dour analysis is the effect of dramatically lower oil prices. Gas prices, even here in California, are now flirting with $2.00 a gallon from just over $5.00 only six months ago. Economists believe that the effect of this drop in fuel prices is double or triple the amount of the $150 billion 2008 economic stimulus package, and it accounts for about 4% (and counting) of disposable income that is no longer being “disposed” of in the tank. Presumably, these economists also hope that consumers will spend this extra cash on baubles and trinkets, rather than stuff it under their mattresses as I have done.