The real estate sector was one of the most impacted parts of the stock market in 2020 as the COVID-19 pandemic swept across the United States. People were forced to stay indoors, work from home, and avoid public places, none of which were good for commercial real estate businesses.
Not surprisingly, ever since news of safe, effective vaccines began to emerge in November, the real estate sector has been one of the market's best performers. Since Pfizer's (NYSE: PFE) initial Phase 3 data came out in early November, the Vanguard Real Estate ETF (NYSEMKT: VNQ) is up almost 10%, and many real estate investment trusts (REITs) in the most affected subsectors like retail, hospitality, and office are up by 50% or more since then.
While they aren't quite as easy to find as they were six months ago, there are still bargains to be found in the real estate sector. Here are three real estate stocks in particular that investors should take a closer look at now.
Data center REITs have cooled off
Data centers was one of the best-performing real estate subsectors in 2020, and for good reason. All of the remote work, streaming, and general stay-at-home activities created an enormous surge in the volume of data flowing around the globe. In fact, at one point in March 2020, Digital Realty Trust (NYSE: DLR) was the only stock in my portfolio that was higher for the year.
While reopening REITs like retail and hotel operators have surged in recent months, so-called "stay at home" REITs including data centers have taken a bit of a pause. In fact, Digital Realty is down by about 2% since the vaccine news started to emerge.
However, with a rapidly growing number of connected devices, the gradual 5G rollout, and the growth in data-heavy technologies like autonomous vehicles and augmented reality, the data center market should have decades of steady growth ahead of it.
The largest REIT in the market is American Tower (NYSE: AMT), which owns cell towers located all around the world. And it has performed even worse than Digital Realty recently, for the same reason -- its business wasn't negatively affected by the pandemic. In fact, people relied on their connected devices more than ever. So, now that the pandemic is (hopefully) coming to an end soon, investors seem to be more interested in stocks with a more immediate benefit from the world returning to normal.
However, the rollout of 5G infrastructure will take years to play out, and American Tower is one of the more recession-proof REITs in the market. If American Tower looked too expensive a few months ago, it might be time for another look.
The most resilient type of commercial real estate has underperformed
Finally, I'd call healthcare real estate the most resilient type of commercial real estate in the market. Not only is healthcare an essential service during a pandemic, but it's also an essential function of society, no matter what the economy is doing.
The pandemic was rough on the senior housing industry, as COVID-19 infections caused move-in rates to grind to a near-stop for much of 2020. But Healthpeak Properties (NYSE: PEAK) has underperformed the rest of the real estate sector lately, despite senior housing being only one of its property types. About two-thirds of its portfolio (and all its recent development attention) consists of medical offices and life sciences, which are especially exciting growth markets.
The bottom line
Despite the recent strong performance in the real estate sector, these three stocks could be worth a closer look for long-term investors while they're somewhat out of favor.