Investing in real estate stocks has been quite a challenge since the COVID-19 pandemic broke out last March. As commercial real estate teetered on the brink of collapse, home prices soared to record highs in the US as people in lockdown sought bigger homes and a suburban lifestyle.
That contrast caused the shares of hotels, shops and office landlords to collapse, while homebuilders and companies managing home rentals soared. But that equation changed in the past quarter as investors, with their eyes on the economic recovery following COVID, began to pull in the stockpiles of shopping center operators and global hotel chains.
Shares of Simon Property Group (NYSE :), America's largest shopping center operator, are up more than 40% since the approval of emergency vaccines in the U.S. Similarly, Marriott International (NASDAQ 🙂 up more than 30% in the last three months.
Simon Property Group weekly chart.
While the shares of these companies are still down more than 10% compared to their pre-pandemic levels, their rapid recovery suggests that some investors think the worst is over for these sectors as the rapid rollout of vaccines a huge, pent-up demand for shopping and travel.
Marriott International Weekly Chart.
A Long Road Ahead
Despite this strong recovery in the short term, we don't see these two real estate categories as of the woods yet. Some hotel managers have warned that their business will not fully recover until 2023, even if the pandemic comes under control. Some business leaders, including Microsoft (NASDAQ 🙂 co-founder Bill Gates, have suggested that business travel isn't going to return to what it was, maybe someday.
"We still have a long way to go, but this crisis will end and I think travel will soon recover," Arne Sorenson, Marriott CEO, told investors in November. But he added that the timing of a full recovery remains “unpredictable”.
For the largest shopping center operators in the US, the future does not look as bright as the recovery in their stock prices suggests. According to a recent report from Bloomberg, about $ 52 billion has remained unpaid in retail rent since April.
"You're going to have big bubbles that will hit next year or even in the fourth quarter," said Andy Graiser, co-president of consulting firm A&G Real Estate Partners. "I'm not sure they can make those payments on top of their existing rent."
Deferred rent was the main factor, causing CBL & Associates Properties (OTC 🙂 and Pennsylvania RE Investment Trust (NYSE 🙂 to go bankrupt in November. However, shopping giant Simon appears to be in a better position, as it collected 85% of rental income in the United States, up from about 72% in the previous quarter. Brookfield Property Partners (NASDAQ 🙂 said it had collected about 75% of the rent from shopping center tenants during that time.
Bottom Line
The mixed picture of this risky segment of the real estate market shows that big commercial real estate gambling is not a good idea, especially when the number of coronavirus cases in the US increases, new variants of the virus emerge and the rollout of vaccines remains a challenge for health authorities.
