As the world battles to contain the coronavirus outbreak with empty streets and silent skies, certain real estate sectors have taken a severe hit in the financial markets.
Outside of food retail, shopping malls have had virtually no footfall for two months. Hotel, travel and leisure sites are in mothballs as vacations are cancelled and conferences postponed. Offices are largely empty as employees work from home. Health care facilities, including senior housing and skilled nursing facilities, have been especially hard hit by COVID-19 due to the age and preexisting conditions of many of their residents and patients, while significant restrictions on elective procedures have hurt the profitability of hospitals and medical office buildings.
As a result, the FTSE NAREIT All Equity REITs Index has fallen harder than the broader market during the current crisis, and is recovering more slowly. Since the peak on February 21, it has fallen behind the S&P 500 Index by some 13 percentage points.
It’s not all bad news for listed real estate, however.
Real estate investment trusts (REITs) often benefit from expectations for low interest rates, and COVID-19 has made low rates likely for an extended time. That could support asset values, enable real estate operators to refinance on favorable terms and attract yield-seeking investors.
More importantly, the crisis appears to have greatly accelerated some long-term growth themes that are surprisingly prominent in real estate.
Changing the Way We Live…
We are pleased to say that our REITs portfolios were well positioned when COVID-19 hit markets in March. That’s not because we forecast a pandemic. It’s because we’ve long observed that Millennials, in particular, are changing the way that we live, work and shop. Our relatively concentrated portfolios have been geared to these changes for some time.
The way we live is changing as we become more connected. This is about relying more and more on our mobile devices for information and entertainment, but also the potential of the “Internet of Things” to create fully networked homes, factories and supply chains. These advances require the rollout of 5G connectivity, which in turn requires a much denser, “small-cell” communications infrastructure than we currently have.
That is already generating a lot of demand for cell towers, a growing subsector in the REITs universe. COVID-19 has made us all more reliant on our mobile devices; the disease itself will be fought with contact-tracing smartphone apps; and, as our colleague Y.T. Boon has argued, automated smart supply chains would be far more resilient to a future pandemic than our current, hands-on arrangements.
The way we work is changing as offices and meetings become increasingly virtual. That requires a massive movement of data onto the cloud—which, in reality, is a multiplying phalanx of very un-cloud-like warehouses hosting vast datacenters. Although use of traditional offices will return, many expect increased work from home to become a lasting impact of the COVID-19 crisis, which should bolster the already rapid growth of datacenters in the world of REITs.
Together, these telecoms and data assets have gone from virtually zero in the FTSE NAREIT All Equity REITs Index 20 years ago to more than 30% today.
… and Shop
And then there is shopping. Online commerce is hardly a new trend, but the lockdown has broadened both the consumers getting involved and the goods getting bought. Online grocery providers were swamped by demand in the first weeks of the crisis, and many retailers who did not trade online before have scrambled to get established. It’s unlikely this will completely revert once restrictions are lifted.
Online commerce is often seen as a pure threat to retail real estate. It is indeed devastating for the traditional, average-grade shopping mall, but it also creates huge new demand for warehouses and last-mile distribution centers, and is changing the way higher-grade malls are used. It is estimated that e-commerce requires three times as much real estate as so-called “brick-and-mortar” retail.
Winners of Tomorrow
We generally favor quality in portfolios. A fortress balance sheet is perhaps the best defense against the lockdown, as well as a crucial factor for socially responsible objectives such as avoiding job losses.
Within these parameters, traditional elements in the listed real estate universe may offer opportunity today, particularly at reduced valuations. Moreover, the future has not yet been written in key areas. For example, with the experience of the pandemic, businesses may seek to reverse the trend toward office densification and open flooring arrangements to practice social distancing, even as they acknowledge the benefit of some work-from-home activity. Similar rethinking may affect health care facility design as well.
Nonetheless, technology and e-commerce assets have provided their own kind of resilience over recent weeks, and in our view, that’s because they are exposed to powerful long-term growth themes that are accelerating right before our eyes.
We think the real estate sectors holding up well today are a good guide to the winners of tomorrow.
You can listen to Steve Shigekawa talk through some of these themes and recent REITs performance in the latest episode of our podcast series, Disruptive Forces in Investing.
In Case You Missed It
- ISM Non-Manufacturing Index: -10.7 to 41.8 in April
- U.S. Initial Jobless Claims: +3.17 million in the week ending May 2
- U.S. Employment Report: Nonfarm payrolls decreased 20.5 million and the unemployment rate increased to 14.7% in April
What to Watch For
- Monday, May 11:
- China Consumer Price Index
- Tuesday, May 12:
- U.S. Consumer Price Index
- Wednesday, May 13:
- U.S. Producer Price Index
- Thursday, May 14:
- U.S. Initial Jobless Claims
- Friday, May 15:
- U.S. Retail Sales
- Eurozone 2Q2020 GDP (Second Estimate)
Statistics on the Current State of the Market – as of May 8, 2020
|S&P 500 Index||3.6%||0.7%||-8.7%|
|Russell 1000 Index||3.9%||1.0%||-8.8%|
|Russell 1000 Growth Index||5.1%||2.2%||0.8%|
|Russell 1000 Value Index||2.4%||-0.7%||-19.0%|
|Russell 2000 Index||5.5%||1.5%||-19.9%|
|MSCI World Index||2.9%||0.5%||-11.8%|
|MSCI EAFE Index||0.9%||-0.4%||-18.0%|
|MSCI Emerging Markets Index||-0.5%||-1.4%||-17.7%|
|STOXX Europe 600||0.0%||-0.3%||-19.8%|
|FTSE 100 Index||3.1%||0.7%||-20.3%|
|CSI 300 Index||1.4%||1.4%||-3.1%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.1%||0.1%||2.9%|
|Citigroup 10-Year Treasury Index||-0.4%||-0.5%||11.9%|
|Bloomberg Barclays Municipal Bond Index||0.8%||1.1%||-0.8%|
|Bloomberg Barclays US Aggregate Bond Index||-0.3%||-0.4%||4.5%|
|Bloomberg Barclays Global Aggregate Index||-0.8%||-0.8%||0.8%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.8%||0.6%||-6.4%|
|ICE BofAML U.S. High Yield Index||1.0%||0.7%||-9.2%|
|ICE BofAML Global High Yield Index||0.5%||0.4%||-9.8%|
|JP Morgan EMBI Global Diversified Index||1.5%||1.7%||-10.0%|
|JP Morgan GBI-EM Global Diversified Index||1.4%||0.4%||-11.5%|
|U.S. Dollar per British Pounds||-0.7%||-1.3%||-6.0%|
|U.S. Dollar per Euro||-1.2%||-0.7%||-3.1%|
|U.S. Dollar per Japanese Yen||0.4%||0.5%||2.1%|
|Real & Alternative Assets|
|Alerian MLP Index||3.0%||-1.9%||-37.2%|
|FTSE EPRA/NAREIT North America Index||1.9%||-2.0%||-24.9%|
|FTSE EPRA/NAREIT Global Index||1.2%||-1.4%||-24.4%|
|Bloomberg Commodity Index||2.7%||2.3%||-22.7%|
|Gold (NYM $/ozt) Continuous Future||0.8%||1.2%||12.5%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||25.1%||31.3%||-59.5%|
Source: FactSet, Neuberger Berman.