Listed real estate investment trusts remain down more than 10% year-to-date, failing to fully participate in the recovery from the market’s March lows. Retail mall REITs have been among the market’s worst performers, with some losing more than 50% for the year. Brick-and-mortar retailers have been crushed by the pandemic, with temporary store closures and acceleration of e-commerce adoption amplifying pressure on stores and mall operators.
Lodging REITs have also performed poorly, as hotel occupancy collapsed amidst drastic reduction in business and personal travel. Offices around the country are largely empty, with employees working from home at an unprecedented rate. Although office vacancy rates have remained stable, major employers may shrink their real estate footprint when leases expire.
High unemployment rates may also hurt the real estate market, as multifamily apartments could face rent delinquencies and rising vacancy rates if the economy remains weak for an extended period.
But despite the many risks, there are compelling reasons to selectively invest in real estate.
Regional malls have been the epicenter of e-commerce’s impact on retailers and, by extension, retail real estate landlords. Not all retail properties face distress, as necessity and convenience-driven retail, such as grocery-anchored shopping centers, convenience stores and gas stations, are experiencing fewer problems with rent delinquencies and defaults.
These tenants provide essential goods and services, making them much more defensive and less vulnerable to e-commerce than tenants in regional malls, whose products tend to be discretionary and more easily ordered online and delivered directly to homes.
Distress among retail malls dominates the headlines, but real estate is far more than the retail segment. Multifamily vacancy rates are typically stable due to inelastic demand, but some investors fear that the pandemic will change household preferences from renting to owning while creating an exodus from densely populated urban areas.
The constrained supply of single-family homes for purchase (or rental) and continued tight lending standards make a major decline in demand for multifamily unlikely. In the multifamily residential segment, pressure may build in the luxury tower market in major cities. “Workforce” housing catering to lower wage workers may also face pressure given the disproportionate impact of the pandemic on lower-wage workers. Upscale suburban garden-level apartments located in highly rated school districts may be “COVID beneficiaries” as more renters seek to move away from densely populated urban areas.
Rent collections in the multifamily segment have averaged in the high 90s despite the pandemic, and tenant turnover has been lower than is normally the case.