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Is There More Upside in REITs in 2021?

By Matthew Frankel, CFP® - May 1, 2021 at 7:11AM

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Real estate has performed quite well so far this year, but could there be more room to run higher?

Real estate has been one of the best performing sectors of the stock market so far in 2021, beating the S&P 500 by more than four percentage points through the end of April. However, there could be even more upside ahead as the COVID-19 pandemic gradually comes to an end. In this Fool Live video clip, recorded on April 20, contributor Matt Frankel, CFP, and Abby McCarthy, senior VP of investment affairs for the National Association of REITs (Nareit), discuss why the outlook for REITs for the rest of 2021 is very positive. 

Matt Frankel: So, a lot of REITs have done really well since the economy started to reopen. I think since the initial news of the Pfizer vaccine was released in November, a lot of the sectors you mentioned like retail and things like that have pretty much gone straight up. Do you think we've seen the bulk of that or do you think there's a lot more potential as the economy keeps getting back to normal?

Abby McCarthy: It's obviously difficult to forecast the future when you're talking about stock performance. But I think what we see is still quite a bit of upside. For example, in the lodging and resort space, we do know that there has been a lot of improvement priced in to the hotel REITs' returns recently and they've seen great performance. But we also know that there's still some constraints in that property sector. We do anticipate leisure travel to pick up quite robustly in the next couple of months as people have delayed or canceled weddings or family gatherings in this past year. As more of the vaccine rollout continues to happen, we do anticipate leisure travel to increase quite a bit. Business travel, I think will still stay somewhat constrained. We've seen some recent surveys that have suggested that only somewhere around 65% of folks believe that they will be traveling for business in second half of this year. I think that really allows for more upside potential in the lodging space going forward as we see that leisure recovery and then eventually a business travel recovery as well.

Other sectors that I think are really poised to do well are any of the sectors that have to do with housing. I'm talking about apartment rentals, single-family rentals, and manufactured homes. We're really seeing a tremendous amount of demand across the housing space. Most of the REITs in the apartment sector own very high-quality apartments in major metropolitan areas, which I think some people felt at the beginning would see, as people fled to less expensive areas, that there would be some stress there. But really, I think what we've seen is that those occupancies have stayed consistent, that the tenants in a lot of those properties tend to be those who can also manage working from home.

Then going forward, I really think that we're seeing in the single-family rental market a tremendous amount of demand as there is a significant portion of Americans who are not ready or in a position to buy a home, but would like this space and the extra amenities that being in single-family rental provides you. We see strength in those sectors. Also, what's a bit surprising right now is that retail has seen quite a bit of bounce-back strength. We are seeing that as people are becoming vaccinated, they are actually returning to malls and especially regional shopping centers where many of the businesses have already reopened or have been able to reopen with some COVID restrictions in place but that actually make it viable for people to shop, eat and return to those centers. Those are the three main sectors that we really are seeing strength right now.

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