As that chart shows, Camden Property Trust (NYSE: CPT) and Mid-America Apartment Communities (NYSE: MAA) significantly outperformed Equity Residential (NYSE: EQR) and AvalonBay Communities (NYSE: AVB). That's mainly due to location. Camden Property and Mid-America Apartment focus on lower-cost suburban areas and cities in Sun Belt states (where people moved to during the pandemic). Meanwhile, Equity Residential and AvalonBay concentrate on high-cost coastal cities' urban core areas (where tenants fled to save money, since they didn't need to live near their urban offices).
There was a similar disconnect among retail REITs. Those focused on shopping centers and retail malls suffered -- generating total returns of minus 27.6% and minus 37.2%, respectively -- while REITs concentrating on freestanding retail locations performed much better at minus 10.5% on average. That's because most freestanding retail locations are essential retailers like convenience stores, pharmacies, and home improvement stores, which remained open all year. Thus, these tenants were able to generate sales and pay their rent.
These performance differences highlight something REIT investors shouldn't miss: It's vital to understand what a REIT owns, because that can greatly impact its returns relative to its peers.
Certain REITs could get a shot in the arm if vaccines roll out quickly
As mentioned, the biggest factor weighing on REIT performance last year was the COVID-19 outbreak. The pandemic hit several sectors hard, including retail, apartments, office (minus 18.4% total return), and lodging/resorts (minus 23.6%). The outbreak forced governments to restrict nonessential businesses, activities, and travel to slow the virus' spread.
However, those restrictions could be a thing of the past by this summer if the country can vaccinate enough people to stop the virus from spreading. That would enable companies to reopen their offices, likely driving renters back to urban areas. Those tailwinds should boost shares of office and apartment REITs. Meanwhile, it would give people more freedom to go shopping, eat at restaurants, enjoy entertainment, go on vacation, and travel for work. Those activities would boost the fortunes of retail and hospitality REITs.
The valuation differences could fuel deal-making
Many REITs believe the sell-off in their shares last year was an overreaction. Because of that, several launched stock buyback programs to take advantage of the difference between the underlying value of their real estate and their stock price. For example, office REIT SL Green Realty (NYSE: SLG) boosted its stock buyback authorization up to $3.5 billion, while AvalonBay launched a $500 million buyback program.
Brookfield Asset Management (NYSE: BAM) has also been trying to take advantage of the disconnect between public and private real estate values. It launched a $1 billion repurchase program for shares of its publicly traded affiliates, Brookfield Property Partners (NASDAQ: BPY) and Brookfield Property REIT (NASDAQ: BPYU), in hopes of boosting their valuations. However, it has grown so tired of waiting for the public market to see this value that it wants to take those entities private.
This disconnect in the REIT sector between where the public market values REITs and their portfolios' underlying value could cause other similar moves. More REITs could launch stock buyback programs, complete a merger, or go private to try and unlock this value.
The bottom line: Some REITs could have big years in 2021
While last year was challenging for most REITs, 2021 could be much better. That's because the primary headwind facing REITs in 2020 -- the COVID-19 outbreak -- could fade in 2021 as vaccines roll out. That would give certain REITs a huge shot in the arm, especially those that struggled last year due to their property or location focus. On top of that catalyst, there could be some corporate moves aimed at boosting value.
Given all this, investors should focus on REITs that could ride these tailwinds, since they could produce the best total returns of 2021.