Last year was a challenging one for real estate investment trusts (REITs). The total return produced by the average equity REIT was negative 10%, with many REITs falling even further. Weighing on the sector was weak rental collection rates because of the pandemic and uncertainty about what's ahead.
However, 2021 brings with it a healthy dose of optimism because vaccines are starting to roll out across the world. As that happens, it should help slow the virus's spread and give people the freedom to shop, travel, return to work, and enjoy entertainment. That would provide REITs focused on owning those types of properties a huge shot in the arm.
Retail REITs took it on the chin in 2020. Governments mandated nonessential retailers close their doors to stop the virus's spread early on in the pandemic, which impacted these REITs' ability to pay rent. That hurt landlords like regional shopping malls and shopping centers, many of which had to suspend or reduce their dividends to conserve cash. Market conditions got so bad that two mall REITs filed for bankruptcy.
However, the lockdowns have caused lots of pent-up demand. While consumers blew off some steam during the third quarter by going on shopping sprees, that could become even more pronounced in 2021. As vaccines take coronavirus case counts down, it should give consumers the confidence to start going out more, which should benefit retailers, especially since shoppers are beginning to receive another round of stimulus checks. That should provide retail REITs a boost, which could give more of them the confidence to reinstate or raise their dividends.
Enjoying leisure activities again
Besides getting out of the house to go shopping, more people will likely venture out in 2021 on vacations and enjoy other leisure activities like entertainment. This should help boost hospitality REITs and specialty REITs that focus on gaming and entertainment.
Most hotels have been bleeding cash during the pandemic because of reduced occupancy. However, people traveling for vacation and business again should enable hotels to get back into the black. That should benefit leading hotel REITs like Host Hotel & Resorts (NYSE: HST) and Park Hotels & Resorts (NYSE: PK) since they'll be able to reopen all their hotels and start generating cash. That could enable them to eventually start paying dividends again, which should boost their stock prices following declines of more than 20% in 2020.
Meanwhile, entertainment-focused REITs like EPR Properties (NYSE: EPR) and Gaming and Leisure Properties (NYSE: GLPI) should also see a revival in 2021. With case counts falling, people will be able to go to the movies, enjoy attractions, and spend time in casinos. That will give those tenants a greater ability to pay rent, which should improve those REITs' cash flows. As a result, EPR Properties could reinstate its dividend, while Gaming and Leisure Properties might be able to pay in all cash instead of a mix of stock and cash. It should also help boost their share prices, which lost value last year.
Going back to the office
Vaccines will also allow office buildings to fully reopen, enabling companies to welcome back their entire workforce. That should take the pressure off office REITs. While most collected the majority of their rent during the pandemic, investors fled the sector on fears companies would allow more employees to permanently work from home, reducing their need for office space.
Instead, the opposite seems likely. Many companies have realized offices are crucial for innovation, culture, mentoring, and development, and most can't wait for the day when they can have everyone back together. Meanwhile, instead of cramming as many people as possible into office space, companies will likely need more room to allow for social distancing.
2021 could be a big year for beaten-down REITs
While 2020 was a rough year for REITs, 2021 is looking much better. As vaccines get rolled out, it should give people the confidence to get back to everyday life. That should provide a much-needed shot in the arm for hard-hit industries like retail, office, dining, entertainment, and hospitality, reviving REITs focused on those properties.