Two Views: The Future of Real Estate
Jonathan Litt is an activist investor and the founder and CIO of Land and Buildings, a long/short equity fund that invests in real estate investment trusts (REITs) and other publicly traded global real estate and related companies.
In this Q&A, Litt says the pandemic has accelerated, but hasn’t changed, the trajectory for commercial real estate.
How has the pandemic impacted REITs?
The pandemic accelerated “megatrend real estate“ for REITs. Sectors with strong secular fundamentals saw acceleration. This included warehouse space, as more people were buying online, and data center demand, which boomed as Zoom, e-commerce and file sharing became indispensable to the work-from-home culture. Single-family developers and rental owners saw millennials step up their pace of moving from urban cores to the suburbs. Cell tower owners saw the first 5G iPhone launch and just the tip of the iceberg of the buildout of 5G across the nation.
“Megaflop real estate” was already seeing secular headwinds, which accelerated as a result of the pandemic. Office spaces are likely to see the greatest impact as work from home becomes a permanent part of the office job market. Our best estimate is that, on average, there will be one less day a week of office workers in a traditional office setting, which translates into 20% less demand. Values of office space may well fall 40% before the market stabilizes and begins to grow again. Shopping centers, malls and movie theaters were already under pressure, and the adoption of e-commerce and streaming accelerated during the pandemic. Hotels will likely see a meaningful segment of their business travelers forgoing travel in favor of Zoom meetings.
Cyclical sectors, such as apartments, saw large revenue declines in urban cores and more modest impact in the suburban markets, but will likely stabilize mid-2021 and then begin to recover.
How has the board of directors helped guide REIT management? What were the concerns that came into the boardroom?
Historically, in times of crisis, board and management differences are put aside and we go all hands on deck to figure out the best way to deal with the crisis. We saw this after 9/11 and again in the pandemic. Great boards and managements prospered. But boards who are beholden to management saw CEOs formulating and executing a plan without the benefit of a seasoned board’s experience. These companies tended to underperform.
Land and Buildings has engaged with over 30 boards and management teams in the past nine years. The vast majority of these boards have experienced, thoughtful members who are genuinely interested in executing their fiduciary responsibility to maximize value for all shareholders and, increasingly, all stakeholders. Our observation is that boards often rely on management for information about the company and competitors in the space. Reading research and talking with the largest shareholders should be a high priority for board members so they understand how others perceive the company, management and the business.
Have you made any additional contingency plans as a result of the pandemic?
Every crisis brings about new policies and procedures. We saw this coming out of 9/11 and the global financial crisis of 2007 and ’08. Often those policies and procedures prepare companies for events that will not likely occur again and which create meaningful time to maintain. The same will likely occur post-pandemic. Companies should be prepared for the same crisis if it happens again. But boards should also be taking steps to anticipate the next crisis. No easy task. One area which we are concerned about is cybersecurity and what seems an inability to prevent it even at the highest levels of our government.