One of the areas of the stock market that’s been particularly hit hard in the COVID-19 downturn is real estate investment trusts.
You’re probably familiar with the concerns that contributed to the drop in REIT prices as the economy locked down in March. One important worry has been the trend to work from home. The other has been the difficulties of bricks-and-mortar retail.
For office REITs, remote working during the lockdowns led many companies to consider permanently increasing work from home arrangements. Some analysts believe this will lead to a sharp reduction in demand for office space.
For retail, the fear is that lockdowns will accelerate the movement toward e-commerce as more consumers get comfortable with the convenience and physical distancing of online shopping.
However, it’s important to note that both these trends were already well-established before the pandemic, and there are reasons to question the common wisdom about them.
On the office front, there’s no doubt the move to more remote working is real and office space will be used differently in the future. However, it doesn’t appear offices will be permanently emptied of workers anytime soon.
In a note to clients, TD Equity Research observed that some large tech firms have announced they will allow employees to work from home indefinitely. However, many more companies expect their workforce to return to the office, with more flexible work arrangements in many cases.
The note points to a recent survey of more than 2,300 U.S. office workers by Gensler. It found 70% of office workers want to be in the office for the majority of the week, albeit with increased personal space.
For bricks-and-mortar retail, the situation might not be as gloomy as it seems either. For one thing, the household savings rate in the U.S. and Canada has zoomed higher, bolstered by government income supports and limited opportunities for spending. If confidence returns, consumers could head back to the malls in greater numbers than currently believed.
Elsewhere, people still need places to live and manufacturers still need buildings to make stuff in. So residential and industrial REITs should be fine.
Having said that, we don’t make predictions about the future direction of REITs or any other market, nor do we try to figure out whether any particular investment narrative is correct.
Millions of investors are looking at the market each day and judging the amount of risk they need to be compensated for in return for their expected return. They’ve already priced in the threat of work from home and online shopping to REITs, among many other factors.
Overall, the decline in REIT prices reflects a more muddled outlook for the sector and therefore more risk for investors. For us, it’s an opportunity to be rewarded for prudently taking that risk.
How do we do it? This is where rebalancing becomes so important.
The decline in REIT prices means their weight in portfolios will be below the target set for that asset class. Therefore, we should buy REITs to return them to their target allocation.
It’s not about making bets or guesses. It’s about maintaining discipline.
