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To say that 2020 was an interesting year for the real estate sector and the stock market as a whole would be a massive understatement. After starting the year on an extremely high note (real estate was outperforming the S&P 500 until early March), the sector took a nosedive. From its pre-pandemic peak, the Vanguard Real Estate ETF (NYSEMKT: VNQ) plunged by as much as 43% in March as the COVID-19 outbreak spread across the United States.
Thanks to fiscal stimulus, easy monetary policy, and the light at the end of the tunnel provided by COVID-19 vaccines, the sector has rebounded significantly. However, real estate has still dramatically underperformed the S&P 500. As of December 29, 2020, the real estate sector is still down by 9% for the year versus a 16% gain in the S&P.
While this is certainly disappointing for real estate investment trust (REIT) and real estate stock investors, it could also mean that 2021 could have a strong rebound in store. And while nobody has a crystal ball that can predict the future, here are three of my predictions for the sector in 2021.
The real estate sector will reach all-time highs
The real estate sector reached an all-time high in February 2020, just before the pandemic. To get back to its post-pandemic high, it would take an upward move of about 18% from the current level of the index, as defined by the Vanguard REIT ETF.
My prediction is that we'll get there in 2021. There's currently a lot of uncertainty priced into REITs. Most commercial property types rely on people being willing and able to move about freely. And experts predict that we could have widespread vaccine distribution by March, or that it could take until September or even later. That’s a big window, and I think it will happen on the earlier end, which could be a huge catalyst to REITs.
And, I think the REITs that were hit hardest by the pandemic will lead the way. Mall REIT Simon Property Group (NYSE: SPG) is still down by more than 40% from the beginning of 2020. Most other retail, hospitality, and office REITs are also trading for much less than before the pandemic. The end of the pandemic could change that.
Stay-at-home REITs will lag
On the other hand, I foresee the REITs that performed the best in 2020 -- the so-called "stay-at-home" REITs -- lagging the rest of the sector in 2021. Not that their businesses are necessarily going to perform poorly, but investors are likely to gradually rotate out of these stocks and into the reopening REITs as the economy gets back to normal.
This includes data center REITs like Digital Realty Trust (NYSE: DLR), which benefited from the work-from-home economy. Industrial REITs like Prologis (NYSE: PLD) got a boost from the increased e-commerce demand. And telecom REITs like American Tower (NYSE: AMT) also had a very strong year as the pandemic accelerated the digital transformation, and therefore the need for infrastructure to support it.
To be clear, the three companies mentioned should be fine over the long run. I personally have a significant percentage of my portfolio in Digital Realty. But I'm not convinced they'll have as good a year in 2021 as many other REITs.
Real estate will outperform the S&P 500 -- by a lot
As a final prediction, I'm going out on a limb and forecasting that the S&P 500 will fall in 2021. Not necessarily by much, but I think the benchmark large-cap index will finish the year significantly lower than it is now.
You might be thinking that this is contradictory. How could a swift end to the pandemic lead to an overall stock market decline?
The answer is that the S&P 500 is weighted by market cap, and most of its largest components are "stay-at-home" stocks. Companies like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Facebook (NYSE: FB), and Alphabet (Google) (NASDAQ: GOOGL)(NASDAQ: GOOG) all either benefitted from, or at least weren't hurt by, the pandemic. These five companies alone make up more than 22% of the S&P 500 by weight. Meanwhile, very few of the top S&P components will truly benefit from the end of the pandemic -- a couple of banks and Disney (NYSE: DIS) are the only true "reopening stocks" in the top 25.
So, if I'm right and we see an end to the pandemic in early 2021, it could actually be a negative catalyst for the S&P. And if the real estate sector soars to new highs, it could mean a huge outperformance.
The bottom line: I'm predicting 2021 will be a good year to be a REIT investor.
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