The COVID-19 pandemic was especially hard on the real estate sector, and it isn't hard to understand why. Many types of commercial real estate depend on people being willing and/or able to physically go places. As a result of the COVID-19 lockdowns, capacity restrictions, and closures many businesses have dealt with, real estate investment trust (REIT) subsectors such as hospitality, retail, and office performed especially poorly in 2020.
However, now that there is light at the end of the tunnel, it could be time to focus our attention on REITs that stand to benefit most from the world gradually getting back to normal life. Here are two in particular that are still trading for massive discounts to their pre-pandemic valuation that could potentially double investors' money (or much more) in the next few years if things go well.
Seritage Growth Properties
Seritage Growth Properties (NYSE: SRG) is a unique REIT. It was created for the specific purpose of buying a portfolio of old Sears and Kmart properties, which it is gradually redeveloping into top-notch mixed-use properties. For example, the company converted a Sears space in Wisconsin to a space with a Dave & Busters, Total Wine & More, and other retail and restaurant space.
Now, the COVID-19 pandemic was one major setback, and it certainly didn't help that Sears' bankruptcy happened quicker than the company had originally planned for. However, Seritage has done a great job of selling noncore assets to bolster its balance sheet, and with over 180 properties in its portfolio -- including some large-scale "premier" assets -- there's tremendous potential for value creation as the redevelopments play out.
Empire State Realty Trust
Empire State Realty Trust (NYSE: ESRT) is an office REIT that owns the iconic Empire State Building, as well as a portfolio of other office properties in the New York City area. And there have been a few catalysts that have caused the stock's price to drop:
First, the COVID-19 pandemic hit the NYC area hard, and few people are working in offices. There is significant fear that many companies will switch to remote work permanently, especially in expensive cities. And, like most urban office buildings, Empire State's properties have a significant amount of ground-level retail space, and rent collections haven't been stellar.
One of the most unique things about Empire State is that it owns and operates the observatory atop its flagship building, which has been a must-do NYC tourist attraction for decades. So far in 2021, observatory attendance has been at roughly 9% of comparable pre-pandemic levels. Finally, it's important to point out that the New York City real estate market was starting to struggle a bit before the COVID-19 pandemic hit, which is why the stock had been underperforming for several years prior to 2020.
However, as one of the most financially solid office REITs in the market (over $1.7 billion in liquidity), Empire State can easily wait out the tough times and take advantage of any growth opportunities in the meantime. If the NYC office market recovers in the years ahead, and tourism returns to pre-pandemic levels, Empire State could certainly double from here.
Expect a roller coaster ride
As a final thought, it's important to remember two things. First, the COVID-19 pandemic is certainly heading in the right direction, but it isn't over yet. And it will take some time until the world (and therefore these REITs' business) truly goes back to normal. Second, while Empire State is typically not a volatile REIT, Seritage is on the higher end of the risk spectrum even in normal times. It is a development play, which is inherently riskier than a REIT that simply owns income-generating properties. So, only invest if you're prepared to ride out the ups and downs and plan to hold the stocks for the long haul.