To call the US real estate market varied would be an understatement. According to the National Association of Real Estate Investment Trusts (NAREIT), the country has 13 different property sectors, spanning retail units, industrial facilities, lodgings and residential properties.
There’s no denying that these sectors have had a very different year during the pandemic as stores closed and vacancies rose, while logistics and distribution spaces had a record year, according to JILL, a real estate services company.
With such a complex post-pandemic picture emerging, what are the risks and benefits of investing in real estate? And which are the realty sector stocks to look out for?
The US property market has proved resilient in the face of the pandemic, with fears of a property crash like the one seen after the financial crisis in 2007-2008 proving unfounded.
Figures from JLL show that US real estate volumes plummeted from $400bn in 2007 to under $100bn in 2009 as that crisis hit. The Covid-19 pandemic has had a far more muted impact – although US real estate investment volumes did fall in 2020, they have mounted a strong recovery this year.
Resilient overall figures mask what analysts at PwC have referred to as a “lopsided” impact on real estate. Industrial properties are seeing a surge in demand, just as retail and hotel properties face a more uncertain future.
Reaching towering new heights?
As the pandemic saw us working, shopping and streaming from home, it’s little surprise that some sectors performed better than others in 2020.
The logistics sector had a record year, with the surge in online shopping pushing vacancy rates for warehouses below 5% in the US. Self storage also delivered record performance, as did multifamily properties, with rents reaching record levels across much of the US.
Data centres and telecom towers benefited from soaring e-commerce sales and streaming demand, with stocks like American Tower and Crown Castle enjoying record highs over the course of the pandemic.
As such, publicly traded Real Estate Investment Trusts (REITs) are investing in alternative sectors of real estate, such as science buildings, specialized warehouses and student housing, according to research from PwC.
Record-low interest rates are also creating a favourable environment for property investment and increasing demand for real estate sector stocks. Low rates keep the cost of real estate funding down, and can make dividend payments from REIT stocks’ (Real Estate Investment Trusts) more attractive than the rates available on savings accounts.
“In a generally still-low interest rate environment combined with renewed demand for office and retail space, investors’ search for yield and moderate valuations could be a strong tailwind for the sector,” David Kastner, Senior Investment Strategist at Charles Schwab, wrote in a note.
But some of the real estate market pillars are buckling under the pandemic’s impact. Global office leasing volumes are 25% lower than in Q3 2019, and retail has been hard hit. Bricks-and-mortar stores closed as online shopping grew.
“The pandemic accelerated the retail property sector’s long slide, with store closings and vacancies rising. The only exceptions are grocery-anchored centers, dollar stores and home improvement retailers, all of which are thriving,” PwC research stated.
“The office sector is, unsurprisingly, in the midst of a major reset—with vastly different outcomes based on location and whether a building has flexible layouts and better ventilation systems. Even so, vacancies are likely to keep rising.”
With Covid-19 cases still high in the US, could demand for retail and office spaces remain subdued over the long term? A survey by PwC revealed that 55% of industry respondents did not expect a return to pre-pandemic activity in 2022.
Finally, as the US Federal Reserve indicated that interest rates may rise in 2022, David Kastner at Charles Schwab identified a quicker than expected rate hike as a key risk for the sector, due to its implications for funding costs. Dividend yields from stocks in real estate would also become less attractive if interest rates increased.
Real estate stocks to watch
The pandemic hit retail, office space and hospitality hard. Perhaps unsurprisingly, the four biggest US real estate companies are involved in alternative real estate sectors, from leasing communication towers, to warehouse space.
Below is a list of real estate shares, ordered by the biggest market capitalization, as of 24 November 2021. Could these be the real estate shares to watch?
Founded in 1995, American Tower Corporation (NYSE: AMT) is one of the largest global REITS. It operates almost 220,000 communications sites internationally. American Tower is unusual in providing real estate in the form of communication towers to tenants such as mobile operators.
American Tower forecasts average monthly smartphone data increasing significantly across the world between 2021 and 2026. The company is looking to strategically position itself for success as demand for 5G grows.
Prologis (NYSE: PLD) specialises in providing real estate for logistics, such as warehouses and labs. The company operates in 19 countries, providing services to customers primarily in business-to-business and retail fulfillment.
Prologis’s customers include Amazon, DHL, FedEx and Home Depot. In the third quarter of 2021, it was estimated that goods worth $2.2tn flowed through the company’s distribution centres.
Crown Castle International (NYSE: CCI) provides wireless infrastructure broadband, broadcasting and mobile communication. Crown Castle operates over 40,000 cell towers and 80,000 miles of fibre cabling.
Crown Castle is also looking to position itself to develop its provision of 5G, smart city technologies and the internet of things (the use of wireless technology in homes, wearables, cars and appliances).
Public Storage (NYSE: PSA) is the world’s largest owner, operator and developer of self-storage facilities, with over 2,500 facilities across the US.
In a November presentation to shareholders, Public Storage announced its commitment to increasing its digital offering, including digital property access systems, digital locks, smart cameras and security.
Simon Property Group
Simon Property Group (NYSE: SPG) is a REIT that operates shopping, dining, entertainment and mixed-use destinations globally.
In Partnership with Authentic Brands Group, the company has acquired several high profile retail brands since 2020, including Forever21, Brooks Brothers, Lucky Brand Jeans and J.C. Penney.
Are real estate sector stocks a good buy?
The picture remains very mixed for real estate stocks, with sectors such as warehousing and self storage performing well, while office space and retail demand has faltered.
As always, the choice to invest depends on your portfolio, investment goals and attitude towards risk. You should never invest more than you can afford to lose.
Which real estate stocks to buy
According to the National Association of Real Estate Investment Trusts (NAREIT), there are thirteen different property sectors in the US, spanning retail, industrial facilities, lodgings, and residential property.
Due to the diversity of the sector, real estate offers a wide range to choose from. Your choice between real estate companies in the stock market will depend on your portfolio’s requirements.
Read more: Railroad stocks to watch as international trade rebounds
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