The COVID-19 pandemic has brought many changes to our daily lives. As the economy begins to open up and people search for some semblance of normalcy, we are starting to see which of these changes might be temporary – and which changes are likely to stick around.

The pandemic’s impact was top of mind at this year’s “REITweek” investor conference, held by The National Association of Real Estate Investment Trusts (Nareit). Through meetings and presentations with several of the senior leadership teams from major U.S. listed REITs, in addition to the reporting of their first quarter 2020 earnings, we gained insight into real estate trends that should last through the end of 2020 or longer.

Trend 1: Rent collection should improve going forward

Recently we highlighted rent collections by landlords for the month of April. Data is now coming out for the month of May, and there are even early indications for June. May rent collections look similar to April, thought there is some variation by property type at the margins.

Collections from retail tenants continue to be the laggard. One of the comments we heard at the Nareit conference on retail collections was that it didn’t matter if the retailer had an investment grade credit rating or was un-rated. It didn’t matter if they were a large national retailer or a small mom and pop shop. If their stores were forcibly shut down by local or state authorities during the pandemic, they were less likely to pay their rent. Stores that remained opened were much more likely to continue paying rent. As we progress through June and more non-essential stores can reopen or begin the process of re-opening, these stores have started to pay their rents again.

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During the latter half of March and into April/May some landlords offered deferrals to some or even all of their tenants. While details vary by company, typically the tenant must make up the missed rental payment at some point in the future. In other cases, we have landlords such as mall REIT Simon Property Group (SPG) suing the Gap (GPS) for missed rent. It will take some time for these issues to play out in the court system.

While we hesitate to state that April, May, or June was the absolute low in rent collections, it is clear that collection levels should improve going forward especially as the country reopens non-essential businesses.

Share of Typical Rent Received in April and May
SectorAprilMay
Industrial98.6%95.7%
Apartments94.3%94.7%
Office93.3%92.1%
Health Care87.4%89.9%
Retail
Free Standing71.4%70.1%
Shopping Center45.6%47.7%

Source: Equity market capitalization weighted. Nareit survey of members, public disclosures, and FTSE Nareit All REIT index equity capitalization as of April 30, 2020 via FactSet

Trend 2: Vacations will be drive-to (for now)

With the U.S. now re-opening at various levels across the country, it shouldn’t be a surprise that people want or need a vacation. But many Americans are still hesitant to fly on a commercial airline. This means that for the remainder of 2020, the majority of vacations will probably be drive-to destinations, with destinations that depend on air travel or international tourists taking the hardest hit. Travel destinations such as Hawaii or New York City won’t recover as fast as regional drive-to locations like Myrtle Beach, SC or Ocean City, MD. It’s these locations that should see a faster recovery in the hotel room-nights booked and retail sales in the area.

Driving doesn’t just mean just in a car or SUV. In fact, we’re starting to see a resurgent demand for recreational vehicles (RVs). More and more American are taking vacations in an RV that they’ve either bought or rented, some for the very first time. Just check out the year-to-date stock movements of Thor Industries (THO) or Winnebago Industries (WGO), two of the larger RV manufacturers in the U.S.

Once you’ve rented the RV, you’ll likely head to an RV resort or some sort of campground. Two of the manufactured housing (MH) REITs actually own RV resorts and campgrounds, in addition to MH communities. Some of the communities are even hybrid with various areas of the community designated for either MH or RV. Sun Communities (SUI) is an MH/RV REIT we like, and they own 124 RV resorts and 34 of the hybrid resort communities, in addition to the 2,637 MH communities they own.

Many of the RV sites are rented on an annual basis, and we are hearing availability of transient sites might be low in peak summer months.  Equity LifeStyle Properties (ELS) is another MH/RV REIT that owns 198 RV Resorts as well as some marinas. (If it was me, I’d opt for one of the yurts at their Tranquil Timbers Camping Resort in Door County, WI.)

Trend 3: Work from home to be more prevalent

Many people have been forced to work from home (WFH) for the past few months out of necessity, and while many are quite anxious to get back the office, for others their new home offices have worked out much better than expected. In fact, some may find it to be permanent. Several tech firms have announced that WFH will continue until at least the end of the year, and perhaps forever for some.

At the Nareit conference, several office REIT CEOs countered that employees want to go back to the office, and firms will need even more space to keep employees socially distanced. But, we have example after example of current office-using companies announcing policies to the contrary. While no one really knows what exactly the office environment will look like 10 years from now, we can assume it has much more WFH or flexible working policies than it did pre-pandemic.

While this evolution perhaps take space and revenue away from the office REITs, it should benefit the data center REITs. More video conferencing, more VPN usage, more data and applications being migrated to the cloud all mean more data center space is needed. Data center REITs, such as Digital Realty Trust (DLR) and QTS Realty Trust (QTS), stand to benefit from any trend or technology that forces more data to be created and transmitted from location to location.

Trend 4: More people will move to the suburbs

Let’s face it, you’ve been cooped up in a 1- or 2-bedroom apartment in the city for months. Working from home on the kitchen table. Maybe you have kids, or a cat, or a dog. Maybe you were thinking of having kids or getting a cat or a dog. Suddenly, renting a house in the suburbs might sound more and more appealing. In fact, the recent pandemic is just accelerating a trend that was already starting with millennials moving to single family homes. Both of the single-family rental REITs, American Homes 4 Rent (AMH) and Invitation Homes (INVH), have seen a pickup in activity in the past few months. And the more prevalent work from home becomes, the more necessary a home office becomes.

There’s been a slight pickup in demand for suburban office space or suburban co-working space. Maybe employees need to get to the office, but they don’t want to take public transportation downtown. Maybe a few employees work in similar geography and need space to meet. Maybe you need a place to meet clients but don’t want to lease a full-time office. We think it’s too early to really call this a trend, but it’s worth watching and definitely fits within the flexible working policy umbrella that we will watch unfold.

Trend 5: Retail must evolve

Much like the increased demand for suburban single-family homes, this is a trend that has only accelerated in recent months. If it takes 30 days to create a new habit, then most people have had plenty of time to change their shopping habits during the lockdown.  Whether it’s buying clothing and sporting goods online, or having groceries delivered to your house, people are buying more and more goods online. Retail stores are closing at a furious pace, and online sales are up in almost every category.

But, what online retailers haven’t been able to figure out is how to make home delivery as profitable as pickup in stores. It takes a lot of money to move goods that last mile. We’ve all heard of Amazon’s ambition in drone delivery or autonomous vehicles delivery packages, but most of us have yet to see one in actual service.  What people are using are Amazon Hub Lockers or returning Amazon goods at brick and mortar stores, such as Kohl’s.

We expect more and more commerce to be conducted online, and landlords with physical retail locations must evolve. Malls will need to become more experiential to draw in shoppers. Grocery stores will need to deliver or at least offer online ordering and curbside pickup. Almost every retailer will need to have an omnichannel strategy. Those that don’t will fail to exist.  While malls and shopping centers may spend time trying to reinvent themselves and figure out what works and what doesn’t during the reinvention process, we will likely see more and more retailers close their doors for good.

Meanwhile, online order fulfillment will likely happen in warehouses, with industrial REITs like Duke Realty Corp. (DRE) or First Industrial Realty Trust (FR) poised to benefit. If malls can evolve to become a step in that last mile delivery process, they too have a better chance of survival. Otherwise, we are likely to see more of what happened to the Randall Park Mall in North Randall, OH. Randall Park Mall was the largest shopping center in the U.S. when it opened it 1976. Today, the mall no longer exists and has been razed with an Amazon fulfillment center rising from its ashes.

In Summary

With so many different types of real estate and REITs generally focused on a single property type, it can be hard for the average investor to keep track of what’s going in the world of publicly traded REITs. We wanted to share these noticeable real estate trends with you to help you make informed decisions. For many investors it makes sense to hire a professional money manager to do this work for you.

Several of the REITs mentioned above, such as SUI, DLR, SPG, AMH, and DRE, can be found in our Growth REIT Block. Visit here to learn more or download our app for Apple or Android today.

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Geoff Shaver and clients of Path by Origin, LLC own SPG, SUI, AMH, INVH, QTS, DLR, and CONE.
Path by Origin, LLC (“Path”) is an SEC registered investment adviser.  Mr. Shaver is the Director of Public Securities of Path. The views expressed herein are subject to change, and no forecasts can be guaranteed. The comments provided are for educational purposes only and may not be relied upon as recommendations, investment advice or an indication of trading intent. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of information available from public sources.  The stocks mentioned in this article have been highlighted based on some reported news, quality or characteristic and do not necessarily represent all of the securities recommended for a particular portfolio.  Path is not soliciting any action based on this communication.  Investments involve risk, including the possible loss of principal and fluctuation of value.  Past performance is not indicative of future results. Mr. Shaver and Path disclaim responsibility for updating any information herein. In addition, Mr. Shaver and Path disclaim responsibility for any third-party content.