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BTIG analyst Sarah Barcomb expects the troubled U.S. commercial real estate sector to “generally trade choppily through the noise associated with watchlist asset migration and realized loan losses through the coming earnings prints, particularly until the interest rate picture crystallizes,” she wrote in a note earlier this week.
The sector has been under pressure as the Federal Reserve’s aggressive rate hikes over the last year drove up vacancy rates and the cost of financing and thus reduced demand for related loans. Since the onset of the Fed’s rate hike regime in March 2022, when rates were near zero, commercial mortgage REITs are down over 25%, the note said.
As such, how CRE fares going forward will greatly depend on the central bank’s rate path. Markets, meantime, have been pricing in rate cuts for the summer, but Fed officials have yet to signal any such capitulation with inflation still stubbornly high. At current valuations, Barcomb said, “we see more upside potential in the event the Fed signals rate cuts relative to the downside of higher-for-longer signaling.”
As part of her commercial mortgage REITs playbook, Barcomb started coverage of Franklin BSP (NYSE:FBRT) and Claros Mortgage Trust (NYSE:CMTG) with a Buy rating and a Neutral rating, respectively.
At the same time, she assumed coverage of Starwood (NYSE:STWD), Blackstone Mortgage (NYSE:BXMT), KKR Real Estate Finance (NYSE:KREF), Ladder Capital (NYSE:LADR), rating the all as Buy, citing prospects for favorable risk-adjusted total return opportunities. She also assumed TPG Real Estate Finance (NYSE:TRTX), Apollo Commercial (NYSE:ARI), Ares Commercial (NYSE:ACRE) and Brightspire (NYSE:BRSP) with Neutral ratings.