With the spread of COVID-19, more people are working from home, shopping online, and avoiding restaurants, entertainment venues, travel, and hotel stays. In this environment, many emerging, "non-core" property sectors have benefited, whereas demand for traditional, core property sectors such as hotels, retail, and offices has plunged.
What these and other core sectors have in common is a business model that relies on people gathering, often indoors—highly problematic amid a pandemic. Consider the near-term challenges for some of these "gathering" sectors:
- Lodging: Travel restrictions, hotel closures, and the freeze on business travel have seriously dented demand for hotel stays. A full recovery here could take years.
- Retail: The sector was facing big challenges even before the pandemic. Now, the negative trends are accelerating due to a surge in online shopping—and some changes to consumer behavior may prove permanent.
- Offices: Physical occupancies are depressed, particularly in urban central business districts (CBDs), as employees continue to work remotely. Renewals and rental rates are expected to decline longer term as businesses reassess their need for space and adjust to a weaker economy.
Meanwhile, REIT segments that do not depend on people coming together have seen steady or even elevated demand during the pandemic. Some of the segments that have benefited, and their demand drivers, include:
- Industrial: Companies demonstrating a seemingly insatiable appetite for warehouse and logistics properties to accommodate the surge in e-commerce
- Storage: Pandemic-fueled lifestyle changes supporting substantial need for storage space
- Communication towers: More people working from home, plus telecom providers rolling out 5G wireless service
- Data centers: Businesses relying heavily on vital infrastructure for e-commerce, increased data consumption, and virtual meetings
- Single-family housing REITs: More households searching for more space to facilitate working and learning from home
Against the evolving COVID backdrop we're positioned defensively in general, with an emphasis on these latter property types. But we're also keeping a close eye for potential market signals that might suggest when it's time to pivot to a more aggressive approach.
This would likely entail increasing our exposure to REITs in some of the beaten-down core sectors, whose stock prices may have overcorrected in the pandemic. In this group, we are more optimistic about hotels and urban apartments, which we think could see a full recovery over the longer term, and less optimistic about retail and CBD office space, both of which face pronounced long-term challenges that won't necessarily be resolved with the end of the pandemic.
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