The COVID-19 outbreak has hit certain sectors of the commercial real estate industry hard. For example, it has weighed on hotel occupancy, caused uncertainty for office buildings, and impacted the retail industry. These sectors all started rebounding earlier this year as vaccines began pushing back against the pandemic -- that was, until the delta variant caused cases to spike.
However, while delta is affecting some real estate sectors, it can't touch others. Here's a look at three real estate investment trusts (REITs) that will thrive even if the delta variant wave persists.
A red-hot real estate market
Demand for industrial real estate is stronger than it has ever been. That's benefitting leading industrial REIT Prologis (NYSE: PLD). CEO Hamid Moghadam stated in the company's second-quarter press release: "Demand for logistics space is robust and diverse, and operating conditions remain the healthiest in our 38-year history. Vacancies in our markets are at all-time lows, contributing to record rent growth and valuation increases."
Instead of hurting demand for industrial real estate, delta is likely helping. That's because it's causing additional supply chain disruptions and acceleration in the adoption of e-commerce, contributing to even more demand for warehouse space. Those demand catalysts are helping drive robust rental growth rates, which will likely continue for years to come.
It's also driving demand for industrial real estate by investors, which is propelling asset values higher. These factors should enable Prologis to continue producing strong total returns even if delta weighs on economic growth.
Robust demand for these properties
The pandemic has changed the way people think about housing. An increasing number of people want the flexibility of renting with the size and privacy offered by single-family homes. That's driving demand for single-family rental (SFR) properties, benefitting Invitation Homes (NYSE: INVH), the largest residential REIT focused on the sector.
That was evident during the second quarter. The company leased recently vacated homes at 13.8% higher rental rates than former contracts, while renewals rose 5.8% above expiring leases.
Strong demand for SFRs is leading Invitation Homes to buy more houses. The REIT aims to purchase more than $1 billion worth of homes this year to take advantage of this opportunity. Meanwhile, it formed a strategic partnership with homebuilder PulteGroup (NYSE: PHM) to buy 7,500 homes over the next five years. That will provide it with a steady stream of new acquisitions, helping support continued growth. And with the delta variant raging, demand for socially distanced-friendly housing like Invitation's single-family homes should remain strong.
Healthy demand for this specialized office space
Life science companies like pharmaceutical and diagnostic testing companies have been leading the fight against the pandemic. They've developed therapeutics, vaccines, and rapid tests that allow us to get back to some sense of normality. With the delta variant showing that their work isn't over, life science companies will continue investing billions of dollars into research and development.
That's benefitting Alexandria Real Estate Equities (NYSE: ARE), the largest office REIT focused on life science real estate. The company is enjoying historic demand for high-quality office/laboratory space. That enabled it to lease 1.9 million square feet in the second quarter, its highest in a single quarter. The rental rates on these new and renewal contracts were an eye-popping 42.4% above existing rates, the second-highest rental growth rate in its history.
Given that robust demand, Alexandria spent $1.1 billion to buy 5.5 million square feet of space in its key life science clusters during the quarter. Roughly 4.7 million of those square feet represent value-creating investment opportunities for the REIT, including converting the spaces to meet the specialized needs of the life science sector. With the delta variant showing that the pandemic isn't over, life science companies will continue expanding so that they can fight this virus and try to get ahead of the next pandemic.
Delta is driving more demand for these properties
The delta variant has disrupted the reopening plans of many companies, impacting real estate demand for certain property types. However, it can't touch other sectors like industrial, SFRs, and life science, which are benefiting from the continued strong demand for those properties. That should keep helping REITs like Prologis, Invitation Homes, and Alexandria Real Estate Equities, given their industry-leading focus on those specific property types.