Reit Magazine - March/April 2021 - 44

Baron Real Estate
Income Fund (BRIIX)

$40.7 million
(as of 3/17/21)

Cohen & Steers Realty
Shares (CSRSX)

$6.4 billion
(as of 3/17/21)

Data source: Morningstar

very reasonable valuations. Other sectors to highlight
would be wireless infrastructure and industrial, as we
see continued strong tenant demand.
JONES: The single-family rental sector has benefited
as young families in particular are looking for more
space. Relatedly, REITs that own timberlands and,
in many cases, manufacture lumber and other wood
products, have also benefitted because their primary
use is in new home construction.
KAUFMAN: We like the residential sectors-single-family homes, manufactured homes, apartments.
We also like shopping centers, which I think is a bit
contrarian today. We see good value in that sector
following the underperformance of last year. We also
see value in some of the sectors that have maintained
pricing power and outperformed during the pandemic-cell towers, for example.
YABLON: We think fundamentals in the self-storage
business are reaccelerating quite meaningfully as
people continue to move around the country and
repurpose their spare rooms, and therefore move
belongings into self-storage. We also have a view
that a lot of the sectors that have been negatively
impacted by the pandemic will begin the recovery
story. We think gaming, health care, high-quality
malls, and net lease are attractively valued right now,
but they're also vaccine recovery stories.

WHICH SECTORS DO YOU FEEL WILL
FACE THE BIGGEST CHALLENGES IN
THE COMING YEAR?
JONES: I would be cautious on hotels and office.
For the hotel sector, travel is still very depressed,
particularly business travel. We think that even as
the vaccine rolls out, corporations will be conservative in terms of adding to their travel budgets. The
story on leisure travel is a little more constructive in
that many families haven't had traditional vacations
for the better part of a year, so we could see strong
pent-up demand for leisure travel by the summer.
As it relates to office, the work-from-home
dynamic and the good productivity that corporations have been able to maintain may encourage
them to embrace aspects of remote work even when
the pandemic recedes. If that is the case, this could
serve as a moderator of office demand.
KAUFMAN: We think retail and office will be the most
challenged. Lodging also faces a tough road to
recovery. We're expecting positive operating income
growth, though, for all sectors by 2022. That includes
office, lodging and retail, but we do think that the
rate of growth will lag for the office sector.
YABLON: We continue to think that office will
struggle. Even as the country becomes vaccinated,
companies are thinking about their space needs and

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how to fulfill the needs of their employees, and I do
think there will be a structural shift, where the percentage of people working from home will increase
pretty dramatically, even in a post-vaccination world.

WHAT ARE SOME OF THE KEY POTENTIAL
RISKS OR HEADWINDS TO REIT
PERFORMANCE IN THE COMING YEAR?
BOKOTA: A couple of areas we're watching are the
vaccine and the return to normalcy, as well as the
continued aggressive stimulus, both fiscal and monetary. If we saw any cracks in those positives, I think
that would be negative for all investment markets,
including REITs.
The other thing is keeping an eye on interest rates.
REITs have sometimes had poor relative performances if rates moved up too far too fast, even if rates
were moving up because the economic environment
is improving.
JONES: One thing to pay close attention to is the
pace of recovery within real estate markets as the
pandemic recedes. We would expect the sectors that
have been hurt by the pandemic to begin improving
in the second half of 2021, but there are certainly
open questions about the pace of that improvement
and some questions as to whether the pandemic has
led to changes in behaviors that will endure even as
the risks from the virus recede.
KAUFMAN: I think the biggest risk for REITs remains
the virus. We're very optimistic that science has prevailed here. We see the vaccines coming, but there's
risk that the process could be derailed by mutations of the virus or issues with the rollout or even
the long-term effectiveness of the vaccines. In all
likelihood, there will be some bumps along this path
to recovery, and it will be uneven. We think some of
the behavioral changes that have occurred during the
pandemic may endure, and those will impact certain
geographies or certain sectors longer than others.
KOLITCH: A further reopening of the economy is critical
to an improvement in occupancy, rent and cash flow
growth, and return performance for several real estate
categories. This will not happen overnight, but perhaps
over the course of 2021 into 2022. If interest rates spike,
certain real estate companies and segments could face
headwinds and lose their relative appeal.
YABLON: Vaccine distribution is a key concern. We're
focused on virus mutation and if that will change
the efficacy of the vaccine. Separately, some people
consider higher interest rates as a risk, but from our
perspective, if it is driven by improving economic
activity, REITs can perform well in that environment,
certainly on the back of a return-to-normal trade in a
post-pandemic world.



Reit Magazine - March/April 2021

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Reit Magazine - March/April 2021 - Contents
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