The pandemic-driven shift to a hybrid workplace is having a direct impact on the real estate industry, with winners and losers across the sector.
Office space is expected to suffer as many employees choose to work from home in the post-pandemic era, while residential and industrial space – including e-commerce warehouses and data centres – could continue to benefit from the rapid rise in the digital economy.
Broadly diversified real estate exchange-traded funds (ETFs) are a good way to limit the threat that the shift to hybrid work poses for the sector, says Ben Johnson, director of global ETF research at Morningstar.
“Any negative impact on office REITs [real estate investment trusts] stemming from the trend towards remote work will be offset to some extent by the positive effects this same trend has on specialized real estate companies,” he notes, citing the example of warehousing companies that benefit from rising demand for e-commerce. He also says most of these ETFs have little exposure to office REITs.
Still, not all office REITs will be negatively impacted, argues Josh Varghese, co-founder of Axia Real Assets, a firm that focuses on global real estate and infrastructure assets. He says multi-purpose office space, used for workers and other uses such as events, will be more attractive to employers and, in turn, investors.
For instance, he likes Allied Properties REIT, which he calls “best in the business when it comes to creative office space,” with strong, well-located urban assets. Two Canadian-based REIT ETFs with significant positions in Allied Properties, at about 8 per cent each, are the iShares S&P/TSX Capped REIT Index ETF (XRE-T), with an management expense ratio (MER) of 0.61 per cent, and the Vanguard FTSE Canadian Capped REIT Index ETF (VRE-T), with an MER of 0.38 per cent. XRE has returned 43 per cent over the past year while VRE has increased by about 43 per cent. (All data are total price return from Morningstar.ca as of Sept. 9 close.)
Mr. Varghese’s favourite pick for a real estate fund is the CI Global REIT Private Pool ETF (CGRE-T), given its mix of holdings in data centres as well as residential, two real estate sectors expected to do well in the hybrid world. CGRE’s second-largest holding is Toronto-based Tricon Residential Inc., a rental housing company focused on serving the middle-market demographic across North America. The ETF also holds Allied Properties REIT, which also has data centre assets. CGRE has an MER of 0.96 per cent and has returned about 28 per cent over the past year.
Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, highlights two real estate ETFs that are positioned to benefit from increased wireless and traditional internet usage, through their holdings of companies such as Equinix Inc., American Tower Corp. and Crown Castle International Corp.
The first is the U.S.-listed Pacer Benchmark Data & Infrastructure Real Estate ETF (SRVR-A), with an expense ratio of 0.60 per cent, which has returned 20 per cent over the past year. The second is the Global X Data Centre REITs & Digital Infrastructure ETF (VPN-Q), which has an expense ratio of 0.50 per cent. It has returned about 20 per cent since inception in October, 2020. VPN has many of the same holdings as the Pacer fund, but also includes significant positions in companies such as document manager Iron Mountain Inc. and billboard company Lamar Advertising Co.
Morningstar’s Mr. Johnson likes the Vanguard Real Estate ETF (VNQ-A) for its broad exposure to the entire real estate sector and its low expense ratio of 0.12 per cent. Its top holdings include some of the data centre and cell tower companies in the specialized funds, as well as more traditional companies such as shopping mall developer Simon Property Group Inc. and self-storage provider Public Storage. VNQ, which Vanguard says aims to track the MSCI US Investable Market Real Estate 25/50 Index, has increased by about 37 per cent over the past year.
While there is a case to be made for this kind of diversified fund, Mr. Varghese isn’t a fan. He wouldn’t own a passive REIT index because it doesn’t adjust its asset mix for the new economy.
Given the transition to hybrid work, Mr. Varghese believes it’s more important than ever to invest in REITs that will adapt, in particular in the office segment.
“Commodity office space, that just exists because it can fit people in, will become far less valuable,” he says. “Those that have the right office space and have the right idea on how to curate it will do well.”