When it comes to real estate investing, malls are out, data centers are in.
The real estate space has been a very mixed bag in 2020. Some REITs (real estate investment trusts) in the retail and hotel spaces have taken a beating amid the pandemic, with top names like Park Hotels & Resorts and mall owner Simon Property Group trading down over 50% for the year.
But some investors are seeing promise in other corners of the real estate space—and longtime trends are becoming increasingly evident in a few key REITs. Iman Brivanlou, lead portfolio manager of asset manager TCW’s High Income Equities and TCW Global REITs, says change rarely comes quickly to the asset class.
“Real estate is a really funny one because it’s broadly perceived as benign, very static. People don’t think it’s an evolving sector, but sure enough, like every other sector, it changes over time. It just takes a little bit longer for those other trends to manifest themselves in the real estate market,” Brivanlou tells Fortune.
As lead of TCW’s REITs, Brivanlou has kept an eye on emerging trends for quite some time—and now, he’s sticking with three main REIT spaces that are “winners” in the pandemic and are building on trends that “have legs,” he says: Brivanlou likes REITs in the industrial, data center, and tower spaces because they play into the shift from bricks and mortar to e-commerce (think industrial REITs with Amazon distribution centers), and capitalize on the move to work from home and mobile streaming. He suggests these stocks have “significant tailwinds behind them.
“A few years ago it was very clear there was going to be this big-mobility and big-data demand phenomenon…And yet it wasn’t until recently that you’re seeing it manifest itself in the real estate sector with the outperformance of these data centers and towers, and the backbone of that mobility, big-data theme that’s in the real estate sector,” says Brivanlou.
Digital Realty (DLR)
Among REITs in the data center space, Brivanlou likes Digital Realty. The REIT has soared nearly 19% so far this year, and remains one of the “winners” he likes moving forward. Brivanlou says data center REITs “continue to benefit from astronomical growth in data consumption,” and the rise of the Internet of things, artificial intelligence, and “big-data analytics is expected to continue and likely accelerate this trend,” he says.
Digital Realty is also a favorite of Lori Keith, who manages Parnassus’s $5.1 billion Mid Cap Fund. She told Fortune back in April that “everyone is online right now; everyone is at home accessing their applications. So the data center, in this case, [really has] that capacity and is going to continue to benefit.”
Plus, Keith believes the trend of work from home is “really going to be triggered more widely across many industries today, and that’s going to continue to drive traffic and need for very strong data center capacity.” Indeed, Brivanlou notes that “even when the pandemic is over, we’re not going to go back to similar real estate demand patterns that we had in 2019. The success of these work-from-home models is likely to stick,” he suggests.
All of that potential growth may come at a price, however, as Digital Realty is estimated to trade at around 115 times next 12 months’ earnings, according to S&P Global data.
Crown Castle International (CCI)
Meanwhile, the tower space also provides an interesting investment opportunity, Brivanlou argues, as the world shifts more and more toward 5G and using mobile devices. Crown Castle International is a favorite of Brivanlou’s, which he calls one of the “two primary winners” in the space (alongside American Tower). Crown Castle is up over 14% year to date, but it doesn’t come cheap: The REIT currently trades at around 90 times trailing earnings.
TCW’s Brivanlou suggests tower REITs are “poised to benefit from the growth of mobile data usage, which will spur further carrier investment into towers as 4G and 5G networks continue to be enhanced and deployed.” And he notes “mobile data traffic growth” is expected to more than quadruple by 2025.
Indeed, Dan Chung, the CEO and CIO of Fred Alger Management advisory firm, told Fortune in April that he likes how Crown Castle is “very well positioned” for long-term trends: “As we get more digital, more data being streamed, more videoconferences happening, and also more desire for all of that to be mobile or remote, you need more capacity in the network, and you need to make sure that the network is not only broad enough but dense enough,” he said.
And on the industrial side, Prologis is a standout for Brivanlou. The leading logistics and warehouse REIT owns many Amazon warehouses. Prologis grew revenues some 18.7% last year, and the stock is up about 3% for the year after recovering over 40% from a trough in March. Brivanlou believes industrial REITs like Prologis are “expected to deliver strong rent growth as they benefit from a supply/demand imbalance in the industry,” while “demand is poised to remain strong behind increased e-commerce adoption, an expected reshoring trend, and businesses maintaining higher inventory levels.”
With many of the pandemic-era trends likely to be solidified, for REITs in the data center, tower, and industrial spaces, Brivanlou makes an unlikely comparison: “That stuff is like Nasdaq—it’s up 10%, 15% year to date.”
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