Sudden stay-at-home orders in March resulted in the shutdown of many sectors of our economy and unprecedented job loss. While unemployment benefits, expanded unemployment benefits under the CARES Act, and direct payments from the federal government are keeping many families afloat financially, spending is down and many small businesses have been forced to close their doors for good as a result.
How has the pandemic and resulting economic downturn affected Real Estate Investment Trusts (REITs)? And what does the future look like for REITs in the coming months or years before a COVID-19 vaccine is created? This article will explore all of the factors affecting the value of REITs and suggest strategies for investing in REITs.
What are REITs?
A Real Estate Investment Trust is a company that owns, manages, and/or finances income-producing real property, allowing small investors to invest in real property without the cost and risk of buying or managing any property on their own.
There are many different forms of REITs, and the opportunity to invest in anything from strip malls to apartment buildings to storage facilities. Some REITs only finance the purchase of such properties. These are called Mortgage REITs, or mREITs.
The type of properties held, financed, or managed by a REIT will dictate the stability of its value now and in the months to come.
Rents Are Down Due to COVID-19
If a business is not operating or lacking clients or customers due to the pandemic, it will struggle to pay its rent. Restaurant, retail, and mall REITs are suffering as a result. The health of these investments in the coming months will depend largely upon whether commercial tenants can pivot and do business while adhering to social distancing protocols, and whether tenants are able to take advantage of any of the subsidies and loans under the federal CARES Act to stay in business and pay the rent.
REITs managing or holding apartment buildings will vary in value depending upon the tenants. For those employed by essential businesses and people working from home, continuing to pay rent is feasible. But for those receiving state unemployment benefits or expanded federal unemployment benefits under the CARES Act, the future is uncertain.
The nature of the body of tenants will dictate the value of these REITs. For example, the value of those REITs holding or managing vacation condos will certainly suffer because few are traveling for pleasure.
Essential Businesses Have Remained Open
Grocery and liquor stores as well as healthcare facilities, gas stations, and pharmacies have been largely unaffected by the pandemic, as they have remained open and by and large, doing brisk business. REITs with these holdings or m should retain value.
Other non-essential retail and service businesses such as clothing, jewelry, and shoe stores, casinos, gyms, theaters, salons, and spas have been closed and therefore, unless receiving a loan or subsidy under the CARES Act, may be struggling to pay rent. The value of REITs with primary holdings in these properties will suffer unless these businesses are permitted to open, and can open safely.
The value of data centers and storage and warehouse facilities will likely remain stable due to the continuing need for the same regardless of the state of the economy.
Mortgage REITs (mREITs)
mREITs are intrinsically diversified in that a variety of funding sources is available to them, among them common and preferred equity, structured financing, repurchase agreements, long-term debt, and other commercial and consumer credit vehicles. This mitigates risk.
Because mREITs usually use equity capital more than borrowing to fund acquisitions of mortgages, mortgage-backed securities (MBS), residential mortgage-backed securities (RMBS), and commercial mortgage-backed securities (CMBS), their position will suffer less due to changes in interest rate. However, the default rate of their portfolio will likely increase due to the pandemic economy affecting both commercial and residential borrowers’ ability to pay. While residential mortgages will be federally-backed, commercial mortgages are not, rendering these riskier.
Investigate the Nature of a REIT’s Holdings Before Investing
If you already own REIT shares, the market is down and conventional wisdom suggests adopting a wait-and-see approach.
If you are considering investing in REITs, now may be a good time, but do your research and select the type of REIT that satisfies your tolerance for risk. Unless and until a coronavirus vaccine is created and widely available, business owners, their employees, and their customers all must adapt to the COVID-19 economy. The nature of a REIT’s holdings will dictate whether that REIT can survive and thrive in this unprecedented time.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer