Second Quarter Shows Deceleration in Operating Momentum from Homebuilders

Homebuilders’ positive rating momentum is decreasing, the building materials sector is under revenue pressure, and REITs revenue growth is likely to slow, according to an S&P Global Ratings report published recently. 

Second quarter results showed a deceleration in operating momentum from the homebuilders rated by S&P Global Ratings. According to “Real Estate Monitor: Negative Rating Bias Grows In The U.S. Real Estate Sector,” the sector’s gross margins have likely peaked and could decline over the next several quarters. Lately builders have been offering more incentives, pressuring profitability. Some builders have pulled financial guidance for fiscal 2022. There has also been an uptick in cancellations as consumers reconsider their home purchases. 

While second quarter results for rated building materials issuers were mostly positive, revenue growth is likely to slow over the next year. Demand for building materials is cyclical and an expected housing cool-down will pressure demand for materials used in remodels and renovations. Housing starts are likely to decline to 1.5 million in 2023 from 1.6 million in 2022. In addition, inflationary pressure can also reduce spending on repairs and remodels. High housing prices and rising interest rates hurt affordability and slowed domestic activity in recent months, which will likely worsen into 2023. As demand softens, the ability to pass on cost increases will likely diminish, resulting in growing margin pressure.

While overall operating results for rated REITs in the second quarter were mostly positive, slowing revenue growth is likely in the next few quarters. Retail REITs could see some pressure from tenants holding bloated inventory levels amid weaker consumer demand. For the office sector, a slow pace in employees returning to office and a deteriorating job market is likely to dampen demand for office real estate over the next year.

The complete report, “Real Estate Monitor: Negative Rating Bias Grows In The U.S. Real Estate Sector,” is available to subscribers of RatingsDirect on S&P Capital IQ. 

The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (212) 438-7280 or sending an e-mail to [email protected]. Ratings information can also be found on S&P Global Ratings’ public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.

This report does not constitute a rating action.

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