Chief executive shares views on winners and losers, along with secular trends shaping long-term outlook
Given the sudden and acute “lockdown recession” triggered by the coronavirus over the past months, the average investor might assume that the entire REIT space has been hard hit by sudden losses or reductions in rental income and wholesale erosion of occupancy. But, through the eyes of a veteran like Jeff Olin, one can see clear losers and winners.
“Our blood is supply and demand,” said Olin, who is President, CEO, and portfolio manager at Vision Capital Corporation. “That is the number one factor driving our investment analysis.”
An alternative investment firm focused on publicly traded real-estate securities, Vision has a seven-person portfolio management team including the three senior managers with over 100 years of accumulated expertise in the real estate sector. Olin and his team operate primarily in North America, taking advantage of pricing inefficiencies using an active long-short strategy.
Compounding pain in the physical retail space
“The worst-hit areas are clearly hotels, which are closed and have been hit by the lack of business and holiday travel,” Olin said. “The retail sector has also been devastated, including the triple-net-lease space and malls, which are now receiving just 20% to 25% of their rent collections.”
The agony among malls isn’t new; the space has long faced pressure as e-commerce stole an increasing percentage of retail sales. Many have tried to offset that by also hosting more lifestyle-oriented amenities like gyms, restaurants, and entertainment centres – tenants that were undesirable to the Yorkdales of the world in the ‘80s and ‘90s, Olin said – but their attraction has withered away in the face of lockdowns and widely applied social-distancing measures.
Meanwhile, the industrial real-estate space is somewhat bifurcated. REITs servicing smaller tenants are experiencing mild indirect pain as local contractors get hit by depressed economic activity. But larger operators in the e-commerce distribution and supply-chain space are benefiting from a short-term bump due to increased inventories. Moreover, the secular shift to e-commerce underscores the strong demand for larger distribution centres required by the likes of Amazon.
“E-commerce retailers need three feet of industrial real estate for every foot needed by traditional retailers,” Olin said. “Online buyers are much more likely to return items, so demand is strong. We don’t think there will be too much supply expansion either because, while building structures is easy, getting the attractive locations, near supply of labour and required zoning just right to minimize supply-chain costs, can be challenging.
Resilience in the residential space
On the residential side, he saw robustness in the apartment space due to the twin demographic trends of millennials delaying homeownership and other life milestones, as well as the oldest baby boomers transferring to rental housing in retirement. Security in mortgage financing – courtesy of Fannie Mae and Freddie Mac in the U.S., and the Canadian Mortgage Housing Corporation domestically – lends additional strength to the segment.
Coupled with relatively inelastic demand, low levels of new supply in the Canadian apartment space has helped it hold up well in terms of occupancy and rent collection, making it marginally preferable to the U.S. from the Vision team’s perspective where there has been increased supply. Within the U.S., they’re shorting apartment REITS with exposure to coastal cities like New York and Los Angeles, and going long on the Sun Belt.
“Single-family rental housing has been fairly well-insulated,” Olin said. “These houses are generally located within attractive school districts, and, when you consider factors like square footage and the fact that they have driveways and yards, the rent per square foot is less than apartments.
The single-family rental space is also benefitting from a pandemic-induced transition from apartments to single family due to the less dense environment with no elevators or common areas, and larger spaces to accommodate the shift to working from home.”
He also noted that retirement housing is facing near-term challenges as they keep their doors closed. That has kept them from inviting prospective residents and welcoming new ones – an activity that’s crucial to offset the natural attrition in their occupancy numbers.
Changing the world of work
While offices have been a cornerstone of the modern economy since the 20th century, Olin says that status is being threatened by long-term secular changes. Even before the pandemic, advances in technology have drastically cut the need to maintain physical records and libraries.
“Now, we’re seeing CEOs of major financial and technology companies indicate that their workers have adapted very effectively to work-from-home environments,” he said. “In the short-term, office spaces have done well; people are still paying their rent. But longer term, we see some demand pressure as more companies embrace remote work arrangements.”
Not all types of work can be done from home. Medical researchers and healthcare workers, for example, have had to remain at the front lines of the fight against the novel coronavirus. That has made buildings leasing space to medical and biotechnology companies clear winners during the crisis.
“Over time and as lockdowns ease, we see a lot of areas ultimately participating in a broad economic recovery,” Olin said. “But I think there’s no question that decades from now, people will still be looking back at March 2020 as the month when everything changed.”
