Real Estate Investment Trusts Positioned for 2021 Resurgence, Natixis Says
Commercial real estate will likely rebound in 2021 despite lingering challenges posed by the COVID-19 pandemic, according to an outlook report released by Natixis Investment Managers Wednesday.
Russ Devlin, director of North American research at AEW Capital Management, a subsidiary of Natixis, said in a commentary posted Wednesday that while real estate investment trusts (REITs) faced headwinds in 2020 from the global health crisis, progress in combating the virus bodes well for the sector.
“As COVID-19 vaccines are rolled out, we expect people to return to cities and move about more freely as we get deeper into 2021,” Devlin wrote. “This should help drive a rebound in usage and stronger fundamentals at these harder-hit property sectors.”
Devlin noted that the sectors most impacted by the pandemic have been malls, hotels and offices, but 80 percent of U.S. REITs fall outside these categories. Industries less dependent on foot traffic, such as industrial warehouses and data centers, have proven “more resilient and also have benefited from shifts to more online purchases during the pandemic,” Devlin wrote.
Hotels have been the hardest hit REIT sector since the pandemic hit, with occupancy levels about half of where they were compared with early 2020, Devlin told CO in an interview. Luxury hotels that rely on tourist and business travel have been the most negatively affected, he said, and won’t likely see a major turnaround until later 2021 after enough of the public get vaccinated.
Vacation travel is poised for an uptick in momentum in the second half of 2021, when families will be motivated to take trips they postponed in 2020 or take advantage of savings realized during the pandemic, Devlin said. While business travel will be slower to rebound, Devlin projects that, eventually, it will get a boost as companies decide that sales meetings require in-person visits for competitive purposes.
“If you are competing against somebody, and they are traveling to meet somebody and you are not, I do think businesses will find they are at disadvantage,” Devlin said. “During the past year, I think everyone understood you could get away with just doing it remotely; but when a team shows up in your office, I think they are going to have an advantage.”
Retail REITs were facing obstacles, even prior to the pandemic, from increased online shopping, and Devlin said the recovery for mall assets, in particular, probably won’t come to fruition until later in the year, as more people become comfortable entering large gatherings. Properties with a diverse array of businesses, such as home improvement or grocery stores and pharmacies, have fared far better in the past 10 months, he said.
“I think people will be more willing to shop next holiday season and you could see a nice rebound,” Devlin said, noting that many families have achieved large savings during the past year, in addition to aid from the federal government. “There has been a lot of stimulus and the Biden administration is going to throw even more stimulus at the economy.”
Office REITs have weathered the COVID-19 storm, thanks to many tenants being locked into long-term leases, despite urban office buildings only seeing about 15 to 20 percent occupancy now compared to pre-pandemic levels, according to Devlin. He said landlords will be forced to provide discounts to tenants who have leases expiring soon and will be forced to be flexible with terms, due to uncertainties around how much of a remote working environment will remain post-COVID.
Other drivers that could boost all REIT sectors in 2021 include an increasing number of millennials looking to rent single-family properties in suburban communities, as well as “burgeoning demand” for lab space, senior housing and medical offices.
“A much larger share of the REIT market has strong growth drivers than headlines about struggling malls would have one believe,” Devlin said.
Valuations for REITs are not stretched with yields offering much more attractive spreads than usual compared to bonds, according to Devlin. REITs are also more attractively valued versus stocks for the first time in many years on an earnings multiple basis, he said.