Historically, publicly traded REITs (Real Estate Investment Trusts) have provided diversification to portfolios while offering an equity-like return. A question that has come up recently is, “How have real estate investments been impacted by the coronavirus pandemic and subsequent global lockdown?”
The short answer is that it depends on the type of real estate. Although much of the attention recently has been on a few specific sectors, it is important to remember that there is diversification within the asset class. The S&P Developed REIT index includes eight different sectors which are shown in the pie chart below1.
Through 6/11/20, this broad index is down -20.16% but as you can see in the graph below, the range of returns between publicly traded REIT sectors has been wide.
Specialty REITs, which include data centers and public storage, have held up well and are positive 2.66% for the year. Industrial REITs, which include industrial warehouses and distribution centers are also positive for the year, up 0.09%. Other sectors have experienced significant disruptions. Hotel & Resort REITs are down -42.49% and Retail REITs are down -35.92%.
Another sector that has been a source of concern and debate is Office REITs, which represent 13.7% of the S&P Developed REITs index. This year, office REITs are in the middle of the pack, down -23.86%. However, many have speculated that the newly implemented work from home policies will lead to their ultimate collapse. Given the current circumstances, it is easy to come to the worst of conclusions, but there are several things to consider.
In a recent paper, MetLife Investment Management outlined four factors that should be considered when determining the impact coronavirus will ultimately have on office demand2.
- The number of workers who will permanently begin working from home full time
- The number of workers who will adopt flexible schedules such as working from home one or two days per week
- How firms will change space needs as a result of flex working, and
- How firms will change layouts to be better prepared for future pandemics.
Regarding the first two points, the paper references a 2017 Gallup poll that found “full time (5 day a week) working from home reduced productivity, but partial (1 or 2 days per week) working from home increased productivity.” They concluded that the coronavirus pandemic should cause more companies to permanently offer flexible work from home schedules, but there is not much upside to having most employees work from home full-time.
The last two factors are also interesting points to consider. Over the last decade, office square footage per employee has decreased2. Although flexible work arrangements could lead to a decrease in demand for office space, the potential shift to less dense workspaces could increase the square foot requirements per employee. This could potentially mitigate the impact on square footage of new work from home policies.
Time will tell what the ultimate impact (positive and negative) this unprecedented period will have on real estate and many other things. The pace and strength of the economic recovery will be critical to the sectors that have been significantly disrupted. Going forward, diversification remains an important investment principle across a portfolio and within this asset class.
1 S&P Dow Jones Indices as of 5/29/20
2 MetLife Investment Management - Back to Work: Office Demand in a Post-Pandemic World