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Retail And Hospitality REITs Battered, But Other Classes Are Muddling Through

REIT returns are mostly down for 2020, with retail and hospitality specialists taking the brunt of the contractions as the pandemic cut their properties core sources of revenue.

Other sectors have been hit as well, though not as badly, or are even doing relatively well. Overall, the return trajectory of the REIT industry is negative this year so far. The FTSE Nareit All Equity REITs Index came in at negative 9.9% as of the end of August. The index posted a return of positive 28.66% during all of 2019.

Year-to-date (as of Aug. 31) total returns for lodging-focused REITs are down 47.7%, according to NAREIT, making it the hardest-hit sector, followed by retail, whose returns are a negative 37.3%.

Office-focused REITs have been adversely affected by the pandemic as workers stay home and the future of office absorption is unclear. Office returns were off 25.6%, the organization reports.

REITs focused on apartments have also experienced negative returns, down 22.72% for the year. In the residential sector, a relatively bright spot is manufactured housing REITs, whose return for 2020 is down only 1.94%.

On the other hand, data center REITs have managed to post a gain in returns of 32.5% for the year so far, while infrastructure REITs are up 14% and industrial REITs are up 11.7%.

As workers work from home and students study remotely, the demand for data has buoyed the health of the data center REIT subsector.

"The demand for data is only accelerating with COVID-19," Principal Global Investors REIT Client Portfolio Manager Todd Kellenberger tells Midwest Real Estate News. "The potential increase in the work-from-home type of dynamic only increases the need to build out an infrastructure."

Industrial REITs are riding a wave of online retail activity. As more people buy from home, the demand for distribution centers, including last-mile facilities, rises. But broader economic indicators point to a drop in demand for industrial space during the third quarter of 2020, with a recovery not until mid-2021 or later, according to a report by NAIOP.

Even in the battered retail sector, individual REITs are turning in a wide variety of performances. At one end of the spectrum is mall owner CBL Properties, which is expected to file for bankruptcy by the end of September because it cannot sustain payments on its $3B in debt. By contrast, though battered, Simon Property Group managed to generate funds from operation of $746.5M for the second quarter, or $2.12/share, compared with $1.064B, or $2.99/share, in the same period in 2019.

"I'm pleased with the resiliency of our portfolio and the solid profitability and positive cash flow we achieved in the second quarter," Simon CEO David Simon said during the company's most recent earnings call. "Keep in mind, please, our profitability was achieved despite our U.S. portfolio being closed to the public for nearly 10,500 shopping days during the second quarter."