It's been a bloodbath in the stock market in recent weeks, with the S&P 500 down by about 18% from its highs. Coronavirus fears have grown exponentially, and many areas of the global economy are being significantly disrupted.
Generally speaking, real estate tends to hold up better than most other sectors of the market, and that's exactly what we're seeing here. The real estate sector is down by about 13% from the highs, significantly outperforming the market, and there are some real estate investment trusts that are still near their recent highs.
These 2 REIT subsectors are getting crushed
While much of the real estate sector is holding up nicely, that isn't a universal truth. Two areas of the REIT industry that have been absolutely hammered are retail and hospitality. Just to name a few examples:
- Massive mall operator Simon Property Group (NYSE: SPG) is down by 22% in the past month.
- Leading hotel REIT Host Hotels & Resorts (NYSE: HST) has dropped by 26%.
- Group-focused hospitality REIT Ryman Hospitality Properties (NYSE: RHP) has lost a staggering 42% of its value in a month.
Of course, these are just a few examples. Other retail and hospitality REITs are seeing similar moves, with very few exceptions.
And this couldn't have come at a worse time for retail. Thanks to concerns about e-commerce taking market share from brick-and-mortar retailers, the retail real estate subsector was already one of the worst performing parts of the entire stock market in recent years.
Why are retail and hospitality REITs getting crushed?
In simple English, these types of properties are occupied by businesses that depend on people's willingness to go somewhere. If people stop traveling because of virus fears, guess what happens to demand for hotels? If people don't feel safe in large crowds, guess what happens to foot traffic through malls?
We're seeing this throughout the stock market. This is why airlines and cruise lines have been hit hard as well.
Now, some types of real estate don't necessarily rely on the willingness of the public to go anywhere. Self-storage is a perfect example -- people generally leave their things in a storage unit and seldom return. Industrial REITs are another good example. In fact, we could actually see an uptick in demand for warehouse space as more people choose to stay home and shop online. However, any REITs whose tenants rely on travel or foot traffic for success are the most likely to get impacted by coronavirus fears.
Is it a smart time to buy?
There could be some excellent opportunities for patient long-term investors in the retail and hospitality REIT industries, but it's important to keep a few things in mind:
- First, things are likely to be volatile for some time, and prices could certainly fall more if virus fears get worse. Don't try to time the bottom, but be prepared for a roller-coaster ride while the market turbulence persists.
- At times like these, it's extra important to make sure that a REIT is on solid financial footing before investing. Does it have a reasonably low payout ratio? A strong balance sheet? In short, be sure that the company can make it through the tough times.
Having said that, it could be an excellent time to add some rock-solid retail and hospitality REITs to your portfolio while they're so beaten down. Just don't invest with any money that you might need for the next few years -- and prepare for a bumpy ride.