How The Pandemic Changed Real Estate For The Better And The Worse

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Welcome to 2022!

We’re now two years and then some past the start of the COVID-19 shutdowns. Though considering how we’re still dealing with the repercussions of said cessation of normal life, we can easily say this…

It’s not nearly far enough.

There’s still a lot of work needed to truly recover from the pandemic and the actions we took to combat it. A lot of time. A lot of effort.

A lot of honesty, recognition, and healing.

There’s no way around any of that. Though, with that said, at least we’re well past July 2020.

For that, I’m extremely grateful.

In July 2020, we were stuck in an ever-moving timeline to “slow the spread.” At first, it was two weeks, which would have still taken quite a toll on the economy. But we could recover from it.

Of that, we were confident.

A whole entire month of it though? That was more of a gamechanger. And by the time July rolled around, many a small business was admitting defeat, a number that only grew from there.

So it made complete sense that the fate of so many other companies were being called into question too. Not places like Walmart (WMT) Target (TGT), Home Depot (HD), and Lowes (L), mind you.

And grocery stores were making money hand over fist too.

But their landlords? Now that was another story altogether.

The Rocky REIT Story Reviewed

In 2020, there were a few real estate investment trust subsectors that were doing well, including what I call the “tech trifecta” – data centers, industrials, and cell towers.

And self-storage was booming too.

But most were suffering intensely, both in share price and income.

My regular readers might remember this headline from May 21, 2020: “Office REITs: Coronavirus Killed Corporate Culture.” And even if you don’t, you no doubt recall the repeated speculation about the death of offices.

So many said those buildings would be literal shells from thereon in: Left to be torn down or crumble on their own over eons and ages.

Similar speculation was happening concerning big-city apartments – especially in New York – hotels, resorts, and much more. That’s why, on June 16, 2020, my team published another piece on the subject: “Net-Lease REITs: ‘Social Distancing’ Hits Key Tenants.”

Then there was this piece on July 15: “Retail – Especially Malls – More Impaired Than Most Suggest.” Here’s how that one began:

“In a recent Zoom interview sponsored by New York University, Sam Zell – who chairs five public companies and is worth an estimated $4.7 billion – said that ‘retail is more impaired than most people suggest.’”

That was an intense claim considering how poorly people – especially investors – thought of retail at the time. Yet I agreed “with Zell in more ways than one” at the time.

And sure enough, there was more than one such REIT that crashed and burned from there.

You Inspired Another REIT Article! Keep ‘Em Coming!

As I said earlier, the story isn’t yet settled surrounding the pandemic.

We’re still debating whether there can be a return to “normal” or whether the “new norm” is here to stay. Which begs for some commentary.

But first, I want to give credit where it’s due. Because this is another reader-inspired article idea from my recent “Simon Property Group: My, Oh My, a Mall REIT Buy?” writeup.

It inspired this exchange in the comments section:

Marcoyolo: If you are (an) income investor, it’s not a terrible play. And if we are indeed on the upswing in the economy, than you could be looking at a great play. But if we are in a recession, this stock could (go)… 40%-50% lower. So for me, I don’t like the risk-reward but will keep my eye on it.

Humble Eagles: … another possibility: Mr. Market has already taken 40%-50% out of SPG’s peak price from last November just assuming a worst case and deep recession… But just under two months ago, this is what Simon said about business:

“‘Leasing momentum, retailer sales, and cash flow all accelerated. Given our accomplishments this quarter and our current view for the remainder of 2022, today we raised our quarterly dividend and are increasing our full-year 2022 guidance…:

So the other possibility is a sharp rally and reversion to the mean. We’ll see.

Brad Thomas: I agree and, of course, the real question is what is the “new norm” post-COVID – as you know, many real estate sectors were (changed) forever as a result of the pandemic… some for better (cell towers, data centers, and Sunbelt apartments) and some (for) the worse (urban office, theaters… possibly malls?).

And that brings us to this deep dive on how the pandemic impacted all property sectors…

Subsectors That Are Performing for the Better, Starting With Apartment REITs

This will be the first article in a series on how REITs have changed over the last two-plus years. For starters, I’ll examine subsectors that are doing much better as a result of the pandemic.

My next article will examine a few more winners as well as some losers.

For now though, let’s discuss how migration surged in 2021, accelerating pre-pandemic trends. And it could remain elevated going forward given continuing remote-work opportunities.

In short, Americans are moving from high-cost areas to low-cost areas. Even in this rising rate environment, a house in Texas is going to be more affordable than one in California.

As such, jobs are also migrating to such Sunbelt markets, including Florida and Arizona, which bodes well for apartments there. A few days ago, I explained how:

“As the cost of home ownership rises, rental units become more and more attractive to consumers. This is especially the case in the most supply-constrained markets.”

Within the apartment REIT subsector, we like names such as:

  • AvalonBay (AVB)

  • Mid-America (MAA)

  • Camden Property Trust (CPT)

  • Apartment Income REIT (AIRC).

These high-quality examples all represent opportunities to capitalize on the demographic shift underway across the U.S. Moreover, they’re forecasted to grow by an average 15% in 2022 and 9% in 2023.

(iREIT on Alpha)

Manufactured Housing Is Holding Up Markedly Too

Another residential area that’s exploding right now is manufactured housing. This category already has been time tested through several real estate cycles, though that’s not its only draw.

Several of the REITs within it own RV portfolios too that are spread across vacation destinations packed with family-friendly amenities and activities.

As for manufactured housing specifically… its unique customer demographics are driven by baby boomers with a strong tailwind from future generations. The U.S. population aged 55 and older should grow 17% from 2022 to 2037. And roughly 10,000 baby boomers will turn 65 every day though 2030.

We recommend two REITs in this category, Sun Communities (SUI) and UMH Properties (UMH). While Equity LifeStyle (ELS) has gotten cheaper, it’s still trading just above our Buy below target.

Overall, these REITs are forecasted to generate above-average growth this year and next.

(iREIT on Alpha)

Self-Storage REITs Remain Strong

Self-storage is another subsector that actually enjoyed the last two and a half years. It’s a need-based, recession-resilient asset class with high operating margins and low capital expenditure (capex) requirements.

That results in high funds available for distribution – FAD.

In addition, the granularity of assets and tenant base, reduces volatility, tenant risk and market risk.

Much like apartment REITs, self-storage has become a brand ambassador with its scale and cost-of-capital advantages. It’s been able to consolidate portfolios while generating strong economies of scale.

It’s also invested in technology drivers that allow it to scale via the cloud – something that’s difficult for the mom-and-pop operators it competes with.

Our top picks in this sector are CubeSmart (CUBE) and National Storage (NSA). As viewed below, they’re forecasted to continue generating above-average growth in 2022 and 2023.

(iREIT on Alpha)

Tech REITs Can Take Us to the Next Level

Now of course, COVID-19 sparked an acceleration in certain technology-enhanced property sectors. We were already dependent on wireless data, streaming video, cloud computing, IT outsourcing, and e-commerce logistics.

But boy, did that ramp up!

As I’ll discuss in the next article, that hurt certain real estate. Yet others are benefiting from this increased technology usage.

Obviously, the so-called “tech trifecta” – cell towers, data centers, and industrial properties – make that list. Our top picks in these categories are as follows:

  • Cell tower – Crown Castle (CCI), though American Tower (AMT) is trading at a nudge above our buy target.

  • Data Center – Digital Realty (DLR) and Equinix (EQIX).

As I recently explained to iREIT on Alpha members:

“Another uninformed investor is trying to short REITs… this time, it’s Jim Chanos, president and founder of Kynikos Associates, a New York City-registered investment advisor focused on short selling. His thesis is centered around… hypserscalers… becoming competitors of the operators.”

That includes Digital Realty and Equinix. Here’s more of that article explaining why:

“On his Twitter feed, Chanos said that data center operators are trading at 70x-90x P/E. Which, as most REIT investors know, is completely wrong. Who uses P/E (price-to-earnings) for REITs anyway? Instead, the relevant valuation metric to use is P/AFFO (price to adjusted funds from operations)… using this metric, we can see that DLR and EQIX are trading at attractive valuation levels.”

Think I forgot about industrials? Think again…

Our top picks there include Prologis (PLD) and STAG Industrial (STAG).

We also like Iron Mountain (IRM), a hybrid REIT that continues to expand into data centers.

(iREIT on Alpha)

In Conclusion…

Over the past 10 years or so, the REIT sector has grown rapidly, with many new companies listing and/or expanding.

As I point out in The Intelligent REIT Investor Guide, U.S. equity REITs own roughly 10% of all institutional-quality commercial real estate. So it has enormous potential, even with a current market capitalization of just over $1.4 trillion.

(iREIT on Alpha/NAREIT)

As viewed below, equity REITs have outperformed the S&P 500, Russell 2000, Nasdaq, and Dow in 1972-202, returning an annual average of 11.38%.

(iREIT on Alpha/NAREIT)

Given the broad assortment of REIT properties, we expect shares to continue to outperform – especially when investors have more opportunities to invest capital in areas that offer attractive risk-adjusted returns.

(iREIT on Alpha)

In my next article, I’ll continue to help readers navigate the post-pandemic REIT marketplace. That way, investors can optimize their portfolios with the most opportunistic picks while avoiding those that are least likely.

(iREIT on Alpha)

Note: Since this was first published on iREIT on Alpha, prices may have changed.