The Multifaceted Role of REITs in Post-Pandemic PortfoliosAdvice to the Advisor
“REITs and the 516,000 properties they own and operate will play a key role in bringing America back together,” Matthew Bechard, Editor-in-Chief of REIT Magazine predicts. JR Humphreys, portfolio manager of the Sheaff Brock Real Estate Income & Growth strategy, is in agreement.
To be sure, Humphreys admits, certain areas of real estate were negatively, even severely, impacted by the pandemic, including:
- shopping malls
- “big box” stores
- gaming facilities
- office buildings
In contrast, even at the pandemic’s height, certain real estate types actually prospered, Humphreys points out, citing at least three areas of real estate that actually benefited from the unrest in the real estate industry:
- data server farms (supporting work-from-home and virtual meetings)
- industrial warehouses (supporting the increase in online shopping)
- cell towers (benefiting from the 5G rollout)
Advisors will most certainly be fielding key questions from investors concerning the wisdom of holding on to existing real estate investments and of devoting new dollars to REITs.
1. Won’t the work-from-home trend continue to negatively affect the need for office space?
Humphreys offers several observations relative to office properties in REITs. Long-term, the practicality of work-at-home is limited, he believes. Workers will be unwilling to accept possible pay cuts, not to mention craving the culture of sharing in-person conversations with colleagues. A McKinsey study highlights the fact that certain types of work simply cannot be done from home. “Lab technicians and pharmacists work in the indoor production work arena because those jobs require use of specialized equipment on-site.” By the same token, Humphreys points out, lobbyists and defense contractors need meeting and office space to maintain contact with centers of influence.
2. Won’t the shop-from-home trend negatively impact the need for retail establishments of all sizes?
Just one quarter into this year, Humphreys notes, a positive reversal of fortune in retail REITs has made itself apparent. Shopping malls, including Simon Properties, are beginning to open up again. Despite the growth in online shopping, people, there will continue to be a need for physical stores. Meanwhile, certain nimble mall owners are converting portions of their space to movie theatres and skating rinks.
3. Haven’t entertainment venues become next to obsolete?
Gaming casino properties are beginning to reopen, Humphreys notes. He is buying into REITs owning gaming facilities even as those move back into profitability.
4. Should REIT investors be worried about rising interest rates?
Seekingalppha.com offers five reasons why not:
- The reason rates are rising is that the economy is recovering.
- REITs are trading today at low valuations.
- Mortgage rates remain exceptionally low.
- The spread between Treasury yields and REIT dividend yields is large, meaning REITs are undervalued.
- Certain types of REITs benefit from higher interest rates, with apartment REITs being one because of growing demand.
5. Aren’t apartment property owners suffering because of eviction moratoriums?
The CARES Act eviction moratorium applied to federally related properties. Researchers estimate the CARES Act eviction moratorium applied to between 28% and 46% of occupied rental units nationally.
In terms of apartment property REITs, Humphreys notes that people are migrating away from both the coasts and heading to the Sunbelt states of Georgia, Tennessee, Texas, and Alabama, which will benefit apartment properties in those locations.
REITs will continue to work as portfolio diversifiers for risk-conscious investors, Humphreys emphasizes. Where else can an investor get a relative high yield, the possible increase in that yield, and the potential for capital gains? As the country emerges from the pandemic, and as there is increasing fear that rising interest rates will depress bond prices, REITs, which must pay out at least 90% of their taxable income to shareholders, have become—and should be—of increasing interest.