The stock market made history on Nov. 24 as the Dow Jones Industrial Average soared past 30,000 for the first time. On one hand, the number itself isn't meaningful in the grand scheme of things, as it's simply one gauge of the U.S. stock market. However, it suggests investors are increasingly bullish on the global economy's prospects, thanks to a string of recent positive data on vaccines that could end the global COVID-19 pandemic.
That optimism has implications for real estate investors because that sector has been one of the hardest-hit by the outbreak. As the economy returns to normal, commercial real estate fundamentals and market values should improve, providing a further boost to stock prices across the sector.
A brutal year for real estate investors
Real estate stocks have been under immense pressure this year. The average real estate investment trust (REIT) had lost nearly 20% of its value through the end of October, according to data from Nareit. Among the hardest-hit groups have been lodging and resort REITs (down 50%), retail REITs (down 42%), office REITs (down 36%), and residential REITs (down 22%).
Each subgroup faced a specific pandemic-related headwind that has been weighing it down. For example, hotels have seen occupancy plummet due to a substantial decline in business travel, putting many at risk of foreclosure. Meanwhile, many retailers had to close their doors earlier this year to slow the spread of COVID-19, which impacted their ability to pay rent. Finally, work-from-home trends caused concerns that office occupancy levels would suffer because remote workers are opting to move away from big cities to cheaper suburban areas.
A light at the end of the tunnel
However, November has been a different story for REIT stocks. Over the past several weeks, the market has gotten positive data on three late-stage vaccine trials. That news has fueled a rally across the stock market, with sectors hardest hit by the pandemic, like retail, real estate, and energy, seeing the biggest boost.
For example, leading office REITs Boston Properties (NYSE: BXP), SL Green Realty (NYSE: SLG), and Empire State Realty Trust (NYSE: ESRT) have each rallied more than 40% so far in November, with Empire currently up more than 80%. Driving that surge is the growing belief that the anticipated near-term rollout of vaccines will enable more workers to return to the office in the coming months. That will give office tenants the confidence to sign new leases.
Similarly, retail-focused REITs like Simon Property Group (NYSE: SPG), Kimco Realty (NYSE: KIM), and Federal Realty Investment Trust (NYSE: FRT) have rallied sharply this month, up more than 35% on average. Fueling those gains is the view that vaccines will enable consumers to shop freely again in coming months, giving retailers the cash to pay their rent.
There have been similarly strong rallies in the residential and lodging sectors, propelled by the view that a return to normalcy is just ahead. Thus, there's growing optimism office workers will move back to city apartments, and travel for business and pleasure will rebound.
More milestones could be ahead
A trio of positive vaccine data this month has powered the stock market to a milestone level. That number gives investors a good barometer for the increasing optimism that we're nearing the end of his pandemic. That would be excellent news for real estate investors, as it should cause some of the headwinds holding down the sector to blow away. As they do, real estate stocks could continue rallying as they recover from their deep dive earlier this year.