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Real estate investment market may look different post-COVID-19

Those familiar with the Real Estate Investment Trust market know all REITs are not created equal.

They say that could be especially evident after the COVID-19 global pandemic passes, noting the health crisis could change what kinds of properties REITs own.

Margaret Rhoda

Margaret Rhoda

Margaret Rhoda, an associate at Harter, Secrest & Emery LLP, says the REIT industry is interesting because it represents a cross section of the economy.

Rhoda previously practiced as a corporate associate in the real estate capital markets group at a Chicago law firm, with a focus that included REITs. She is now part of Harter Secrest’s securities and capital markets group.

One way to determine the health of a REIT is to look at how the tenants are faring, Rhoda says. For example, a REIT that owns brick and mortar stores is likely struggling more than one that may have invested in warehouses for the on-line retailor Amazon.

“Think about what the tenants are facing,” she says. “That should give you information on how a REIT will react and the steps that they may need to be take.”

Rhoda says more facts — and more time — are needed to see how the REIT market lands post-COVID-19, but the same trends the market has seen over the past few years will likely continue to do well.

Those trends show growth in REITs whose holdings include logistics businesses, such as FedEx distribution centers, as well as data centers, she notes. In terms of REITs focused on retail operations, those who have grocery tenants could also continue to do well, Rhoda says.

After the 2008 financial crisis, there was interest in companies with distressed assets, and that may be the case once again.

“They may take off as the new shiny object for people,” Rhoda says.

Those she has spoken with in the industry seem to be focused on where individual companies stand and how they are going to do deals in the future. Businesses are looking at ways to raise capital, and others have already started that process, she notes.

“To be honest I would have thought the market would have dried up more,” Rhoda says. “But that’s a testament to how creative people can be about getting deals done.”

Industry experts have noted there are certain REIT sectors that are more recession resilient than others, including data centers; grocery-anchored retail centers; certain health care real estate including hospitals and life science companies; self-storage; and wireless infrastructure, such as cell towers.

They say the reason why these REITs tend to be stable during economic downturns is because they remain in demand. There will likely always be a need for data centers, critical infrastructure and hospitals, for example.

Conversely, other REIT sectors — such as retail, lodging and residential — have a higher probability of suffering loses, and recent data supports those theories.

According to an end-of-quarter report released in March by the trade association NAREIT, publicly traded REITs collectively saw losses of 25.4% during the first quarter of this year. Some segments fared worse than others, notably regional malls, which posted losses as high at 60.4%.

Others, however, weathered the economic downturn better, such as self-storage, infrastructure and data centers, the latter of which posted the best results, NAREIT reported.

Rick Cox, partner in Nixon Peabody LLP’s corporate group, says, as with all industries, COVID-19 has caused a ripple effect from the customer, to the small business owner, to the landlord, to the lender.

REITs are mostly impacted in their capacity as landlord and lender, Cox says.

“Since REITs are required to satisfy income and asset tests, which require that a certain portion of their income and assets be ‘qualified’ real estate type items, when small business operators can’t pay rent or when the value of real estate assets decline significantly, REITs may fail these qualification tests, which would result in them facing severe consequences,” Cox says.

There are ways around these issues, so most well-advised REITs are taking steps to deal with these tests, he adds.

Cox agrees with other industry experts that the most severely impacted REIT sectors are restaurants and retail. He notes REITs in these sectors are scrambling to see how federal efforts, such as The Families First Coronavirus Response Act and the CARES Act, may provide some relief to their tenants and borrowers.

Doug Hendee

Doug Hendee

Doug Hendee, chief sales officer for Brighton Securities, says the initial impact of the COVID-19 outbreak on the REIT market was not good, noting the stock market dropped faster than any other time in its history.

He adds there were already some cracks in the armor pre-COVID-19, particularly in the retail sector which had been getting hammered by online retailers, including Amazon.

“Can we say we didn’t see this coming, yes and no,” Hendee says. “The reality, unfortunately, is it came on really fast.”

Contributing to the uncertainty is the fact that there is no other historical reference to compare this time to.

“There have been ups and downs (in the economy), but we’ve never seen anything like this,” Hendee adds.

While the initial reaction led to financial issues for REITs across the board, certain sectors now appear to be recovering faster than others.

“There appears to be selectivity in how REITs are recovering,” he says.

For example, REITS who focus on cell towers are showing signs of improvement as more people work and socialize virtually.

Moving forward, things that make a REIT attractive from an investment point of view could be looked at in a different fashion than they were before because life may not be the same as it used to be, he says. In other words, how people live their lives post-COVID could affect the business environment, and by extension, the REIT market.

Theoretically, businesses could shrink their office space and opt to have more employees work from home since an initial investment in technology may be more cost effective than owning or leasing property. Also, people could opt to travel less, attend fewer concerts or not eat out as much — all which could impact what types of REIT sectors flourish and which flounder.

On the flip side, manufacturing could see an increase in activity for REITs, as Americans look to a more robust supply chain domestically, he notes. That scenario may increase the need for more manufacturing space.

Pre-virus, the U.S. economy was more than 70% service-based, but post-virus, that could change, Hendee says.

“It makes perfect sense that things may be different on the other side,” he says.

Andrea Deckert is a Rochester-area freelance writer.

One comment

  1. Great article! Post Covid-19, investors and sellers will have to depend more on technology to sell houses, as the social distancing factor is not going away anytime soon. 3D virtual tours will become necessary to cater to potential buyers.


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