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Coronavirus has impacted not only the demand for hand sanitizer and facemasks, but also every corner of the market, including real estate. In March, when COVID-19 cases experienced a swift and steep uptick, real estate investment trusts (REITs) corrected sharply and quickly.
Initial REIT underperformance in the time of COVID-19 stemmed from three major causes: rising credit spreads, exposure to the hard-hit retail and hotel space, and general equity risk-off sentiment.
However, while the pandemic caused the real estate-based equity market to contract in March, the space is no stranger to crisis. Since the beginning of the modern REIT era in the early 1990s, the industry has been faced with five major economic events:
- Russian debt crisis/Long-Term Capital Management crisis of 1998;
- the technology bubble of 2000;
- Sept. 11, 2001;
- the 2008 Global Financial Crisis; and
- today’s global pandemic.
REITs have learned from these experiences and, this time around, they entered the crisis with the low leverage levels, healthy balance sheets and high-quality portfolios.
While REITs still are generating much lower returns than their pre-coronavirus crisis peaks in February, the market has rebounded 30% since hitting its March low, and there is reason for optimism looking forward.
For investors wondering what’s next for the REIT market, we want to highlight five trends in real estate right now:
1. Supply-Chain Reconfiguration
The pandemic has and will continue to accelerate existing trends toward supply-chain disruption. This theme was prominent within the REIT space before the pandemic took hold globally, thanks to changing consumer habits and the ongoing trade tensions between the United States and China, among other events.
The trade war, in particular, forced global manufacturers to rethink the long-term risks of overexposure to any one region, which sparked a trend toward increased flexibility for tenants. The current crisis has only added fuel to this fire.
2. E-Commerce Acceleration
Containment measures across the world have shuttered brick-and-mortar retailers, prompting consumers to take their business online. This is a healthy dynamic, as we believe that the United States is “over-retailed.” Retail tenant bankruptcies will have a lasting impact on occupancy and rental growth.
Effectively, what we expected to take 10 years will happen in two. As this trend toward online retail continues, the industrials sector may be favorably positioned since demand will shift from physical retail spaces to logistics.