The year 2020—marked by economic uncertainty due to the pandemic—has no doubt rattled investors. There was a stock selloff in the middle of the year, and shares of real estate investment trusts (REITs) were not spared. The Dow Jones US Real Estate Index fell almost 9% from its peak early in the year, and stock prices of different REITs tumbled even lower.
But it wasn’t all doom and gloom. Some REITs were largely immune to the impacts of the pandemic and continued to be stable. This blog will discuss which REIT sectors did well in 2020 and are expected to continue doing well going forward, even if the economy takes a hit from COVID-19 setbacks. Here’s a list of REIT sectors worth looking at because they seem to be virus-resistant:
With mobile data usage growing anywhere from 30% to 40% every year, there should be no slowdown in demand for communications towers. Moreover, these types of infrastructure tend to generate steady revenues from long-term leases. As a result, REITs in this sector should remain relatively resistant to economic downturns.
Historically, there has been a stable demand for self-storage space, and many experts agree that this sector should remain steady.
Certain types of healthcare properties
Hospitals, medical office buildings, and life sciences may benefit from the rise in patient visits because of the outbreak.
Retail centers anchored on groceries.
Grocery visits have remained essential throughout lockdowns. While the pandemic has hurt a long list of retailers, grocery stores continued to operate relatively normally.
Datacenter leasing activity is largely immune to economic downturns because companies continue to rely on them to store their information securely. Some experts even say that data centers will become more vital should the pandemic worsen and lockdowns are implemented again. Such events would drive people to use the internet for shopping, socializing, and entertainment.
Now that we’ve discussed the list of REIT sectors that should remain stable in the face of an uncertain economy, it’s time to talk about exactly which REITs should be on your radar. Do note that this is NOT investment advice.
Digital Realty NYSE: DLR
Currently operating 267 data centers with 2000+ customers, DLR is one of the top REITs in this sector. The demand for cloud-based software solutions has enabled it to expand rapidly in recent years—a trend that is expected to continue with a rise in demand for cloud-based applications for artificial intelligence, the internet of things, augmented/virtual reality, and autonomous vehicles.
Experts agree that while it may experience some disruption from a recession, the company should largely remain stable, meeting its targets to grow its 3.4% dividend quickly in the next few years.
Crown Castle NYSE: CCI
With 70,000 small cells and 40,000 communications towers, CSI is one of the biggest infrastructure REITs today. Its assets are vital for rolling out 5G technology. It also enjoys a steady cash flow from long-term leases, enabling it to support its dividend payouts.
CSI expects to grow payouts by as much as 8% per year if it benefits from rapid mobile data growth, which is expected to continue even if a major recession comes along.
Medical Properties Trust (MPW)
This healthcare-focused REIT owns 389 hospitals. It is quite aggressive, having spent $4.5 billion adding to its hospital real estate portfolio in 2019. Its acquisition pipeline is also looking healthy, totaling over $3 billion at the start of 2020. Analysts project that this trend should allow MPW to continue growing its dividend payouts, currently at 4.7%.
Important note: The stock prices of these REITs may very well decline if the pandemic drives the economy into a deep recession and sell-offs intensify. Please do your due diligence and research when making investment decisions.
Investing in REITs in 2021 and beyond
The pandemic has given REITs a difficult 2020. Dividends remain generous, but the sector suffered a loss of 2%. Office and retail REITs were particularly devastated due to work-from-home mandates and lockdowns that resulted in uncollected rents and empty spaces. Even self-storage and industrial REITs were the top performers of the year—were still negatively impacted, posting total returns below the S&P 500.
But there’s good news for investors who want to put money in real estate investment trusts. REITs had a great start to the year. And with COVID-19 vaccines giving hope that there is an end to this pandemic, REITs are rebounding like never before, leading many analysts to believe that now is the best time to lock in the best yields.
Interested? You don’t need a lot of capital to start investing in REITs. You can even buy REIT index funds initially to get your feet wet. Unlike real property, REITs are much easier to sell should you decide you’ve made a mistake.
In addition, you don’t have to worry about your investment being illiquid. It’s a great way to put money in properties without having to endure the lengthy enter-and-exit process involved in traditional real estate.
REITs remain an excellent option for those who want to put real estate in their portfolio but don’t want to make a direct investment. It’s much easier to diversify across a wide range of property types and geographic locations using REITs. They can give your portfolio exposure to property without you having to own or manage a hard asset.
And while some REITs will show diminished performance with economic uncertainties and when interest rates increase, REITs generally outperform other investments even in downturns and high-interest rate environments. In addition, these investment instruments often outperform major stocks during slower markets.
The key is to choose REITs their resilient to the effects of the long arms of the pandemic. Do your research on the growth prospects of specific sectors, geographical locations, and property types.
Keep in mind that certain publicly-traded REITs tend to follow the broader stock market; their prices may go up and down as prices of corporate stocks go up and down, whether the underlying values of the real estate assets within the REIT change or not.
Therefore, it’s essential to ensure that the REITs you decide to include in your portfolio honestly give it the diversification you want.
Lastly, always have a clear game plan. Even though REITs are liquid, it can be expensive to keep trading in and out, with most fees charged upfront. Such costs can take a good chunk off your investment returns. Also, when doing the math on potential REIT investments, don’t forget to factor in that REITs (unlike stock dividends) are taxed at ordinary income rates.