• Residential sales will experience a massive lift during the pandemic, according to Charles Nathanson, an associate professor of finance at the Kellogg School of Management.
  • More homeowners are looking to use their savings from limited vacation and entertainment spending for larger homes and spaces, especially as working remotely continues.
  • However, Nathanson predicts that commercial and rental real estate will be unstable, due to an uptick in moves, evictions, and unemployment. 
  • Visit Business Insider’s homepage for more stories.

The COVID crisis has thoroughly upended how people live, work, and shop. And this, in turn, has upended real estate markets.

Whether it’s tech workers abandoning dense urban cores for more space in the countryside, restaurateurs converting from dine-in to takeout, or companies suddenly going virtual while locked into an office lease, it’s clear that the ways we are using space — and the amount we’re willing to pay for it — are changing.

“The COVID crisis has led to a pretty big reallocation in the shares of goods that people spend money on,” said Charles Nathanson, an associate professor of finance at the Kellogg School.

“For a lot of people, it makes sense to dramatically increase the amount they are spending on the shelter because they’re spending so much more time at home,” he said. But, of course, the calculus looks quite different for companies renting office space for a workforce that may not be coming back anytime soon.

So what might we expect from residential and commercial real estate as we head into the year ahead?

“The key to the real estate markets now is knowing how temporary or permanent the effects of the pandemic are going to be,” said Nathanson.

Residential sales are a bright spot

When cities across the US went into lockdown in early 2020, several things happened

It’s been a tough year for the real estate sector amid the ongoing coronavirus pandemic. Within Nareit’s universe of roughly 200 equity and mortgage REITs, the average real estate investment trust remains lower by more than 30%.

Back during the depths of the shutdowns on April 8, I published “No REIT ETF Is Pandemic-Proof, but These 3 Are Close.” At the time, every single REIT was trading in negative territory. Yet I discussed anyway how a few segments of the real estate universe would not only survive the pandemic…

They could actually thrive.

Source

This included so-called “essential” property sectors like technology, industrial, and housing – ones American simply cannot go without. I also highlighted several real estate ETFs poised to benefit from both near-term pandemic effects and longer-term secular tailwinds.

Today, just three out of 26 of those listed in Morningstar’s U.S. Real Estate ETF category are in positive territory this year. But they’ve been some of my favorite and most widely-discussed funds nonetheless:

  • Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
  • Hoya Capital Housing ETF (HOMZ)
  • Pacer Benchmark Industrial Real Estate SCTR ETF (INDS).

Let’s revisit each and the trends driving them.

Table Description automatically generated

(Source: iREIT)

Technology REITs Powered by the Work-From-Home Era

Taking the top spot is the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF. It holds 22 individual names, 13 of which are REITs.

SRVR is a pure-play way to invest in data centers, cellphone towers, and communications infrastructure REITs and C-corps – businesses set to capitalize on the buildout of 5G, online commerce, artificial intelligence, virtual reality, augmented reality, blockchain, and Internet of Things.

Data center REITs in particular have benefited from the shift from physical office space to remote-work infrastructure. Meanwhile, cellular network usage has surged as businesses and individuals stay

A field in Langland is a big step closer to making way for housing after Swansea councillors voted in favour of the divisive scheme.

Members of the planning committee disagreed strongly about the merits or otherwise of the 31-home application off Higher Lane, which had prompted nearly 1,900 objections.

Cllr Richard Lewis said he felt the council had, over the years, “done the Gower AONB (Area of Outstanding Natural Beauty) proud”.

However, he added: “But I see this as a step in the wrong direction. I think this will be the start of the end of the Gower AONB.”

The development comprises 16 affordable properties, including six bungalows. These will be a mix of shared ownership and below market rental.

The other 15 houses are to be sold on the open market to people with a proven local connection.

Other councillors argued that Gower, and the Oystermouth ward in which the Higher Lane field is located, were very short of affordable homes.

Cllr Des Thomas, who represents West Cross, said more than 90% of people attending his surgeries needed suitable housing.

He also suggested that planning applications in the Gower and Oystermouth areas “seem to raise the same objections from existing residents”.

Residents talk about the plans for the field:

He said: “We have got to remember that all the houses in that vicinity were on green fields at one time.”

Cllr Will Evans said he could see no planning reasons why the application should be refused.

The field in question has previously been earmarked for housing under Swansea’s new local development plan. It is one of six “local needs exception sites” in Gower aimed at giving local people or those on low incomes a chance of remaining in an expensive area.



a small house in the background: This is how part of the 31-home scheme off Higher Lane, Langland, will look


© Coastal Housing
This is how part of

J.C. Penney’s lenders are battling over the company’s real estate and their potential payback as the department store retailer looks for an end to its bankruptcy with the holiday shopping season looming.

Penney is close to having a solution that keeps alive the 118-year-old business and saves 70,000 jobs, but there’s no firm plan yet filed with the court.

Deadlines continue to be missed, casting doubt with the retailer’s vendors, who in some cases are holding back shipments of merchandise that Penney needs if it’s going to have a productive holiday season.

U.S. Bankruptcy Court Judge David Jones set some firm dates at a hearing on Wednesday to force everyone’s hand and calm suppliers that Penney will survive.

Debt holders led by Aurelius Capital Management plan to bid for six distribution centers and 161 Penney stores by Oct. 20 after reviewing a proposed offer from Penney’s secured lenders led by H/2 Capital Partners. Details of the H/2 offer will be filed by Oct. 16 along with Penney’s business plan, said Penney’s lawyer Josh Sussberg of Kirkland & Ellis.

The group led by H/2 would swap $900 million in debt for ownership of the real estate and the retailer would enter into a master lease to rent properties back for $156 million a year.

The Aurelius-led group said in a filing Monday that the existing offer “appears to grossly undervalue” Penney’s real estate to “deliver oversized recoveries” to secured lenders at the expense of the other stakeholders.

There’s a non-binding letter of intent from the two largest U.S. mall operators, Simon Property Group and Brookfield Property Group, to buy the retail operating company and keep the business going.

So far, Sussberg has presented the proposed sale of the operating company and its real estate as something that had to happen together.

Thesis

Washington Real Estate Investment Trust (WRE) (“WashREIT”) has exposure to an extremely stable market in the Washington DC metro area. Its properties cover ground in downtown DC, northern Virginia, and Maryland suburbs. The diversified REIT boasts multifamily, office, and retail holdings.

Management has de-risked its portfolio by transitioning to lower-cap rate, lower-risk, and higher-growth suburban multifamily properties. Capital recycling from high-cap rate to lower-cap rate properties has resulted in a short-term decrease in core funds from operations per share and an underperforming stock price. However, the company is well-positioned for the long term with a suburban multifamily focus.

The sector and market focus position the company to benefit from population and employment migration to the region, as well as a continued housing shortage. WashREIT is undervalued due to its diversified nature and recent core FFO per share declines. Suburban office is stable, and retail makes a small portion of the total NOI for the company. WashREIT is a value at current prices given its relatively low valuation and growth prospects.

Recent Company Actions

Since CEO Paul McDermott joined in 2013, the company has made significant strides to simplify its focus. By reducing its exposure to retail and office, WashREIT has increased its multifamily exposure from 19% to 48% of its total portfolio.

Sector Q4 2013 Q2 2020
Office 56% 46%
Multifamily 19% 48%
Retail 25% 6%

(Source: Company Filings)

Given that multifamily properties sell for much lower cap rates than office and retail, this strategy has been dilutive for WashREIT on an FFO per share basis. While the company generated $1.70 in FFO per share in 2013, this number dropped to $.77 per share through Q2 2020 ($1.54 per share annualized).

However, FFO per share is a poor cash flow metric for REITs with retail and office properties. Leasing