With the housing market and fundamentals showing signs of health, investors may want to begin turning their focus from commercial to residential real estate, according to analysts at William Blair.
The analysts said in an April 27 research note that they have shifted their expectations toward the levels of growth forecast by the National Association of Realtors, based on discussions at the CoreLogic Real Estate Symposium last week. Currently, the NAR predicts 5.6% in price growth for 2015, which is higher than the forecasts from the Mortgage Bankers Association and Fannie Mae.
"We have been more bullish on the commercial real estate stocks than residential within our coverage for more than three years now due to superior fundamentals and visibility on growth (and the cycle)," Brandon Dobell and Keane McCarthy, real estate analysts with William Blair, said in the note. "As the valuations for our commercial coverage have continued to inch higher, the relative opportunity in residential now looks increasingly attractive, especially in the context of the market outlook described at the symposium."
Beyond the mere attractiveness from comparison, the residential real estate industry should experience tailwinds from the expected rise in interest rates and general strengthening of the economy.
Nevertheless, the William Blair analysts did not downplay potential roadblocks to residential real estate's comeback. They noted that inventory shortages, underwriting standards and negative equity all remain concerns. Additionally, they found that student debt could prove to lower the demand among millennials.
Furthermore, the analysts highlighted another industrywide trend: the rising frequency of private capital firms purchasing mortgage-servicing rights.
The research note reported that the level at which nonbanks, including hedge funds and private equity, has been obtaining MSRs is "unprecedented." The researchers said monitoring these transactions between banks and private capital could help to illuminate the demand for origination activity.
Finally, looking at the government-sponsored enterprises, the researchers said the CoreLogic event made it clear that they are here to stay. Most of the symposium's participants said they expected private capital to avoid this area for at least the next decade due to Washington's commitment and the fact that the marketplace gives high value to their loans.
