For REIT investors—like most American businesses—the last 2 months have been bleak.
Following a very strong 2019, where total returns for all publicly traded REITs rose 28.07%, the industry came tumbling down in January as the effects of Covid isolation set in. According to an end-of-quarter report by REIT industry association NAREIT, REITs as a whole saw losses of 25.4% in the first quarter of 2020, with trends in troubled segments like “regional malls’ posting losses as high as 60.4%. By comparison, the S&P 500 declined by 19.6% during the same period.
While some segments like “self storage” and “infrastructure” (largely cell tower companies) have weathered the economic downturn moderately (-7.69% and -0.69% in Q1 respectively), data centers are the one true positive in the current REIT landscape.
Comprising 5 companies (Digital Realty Trust, Equinix Inc., CyrusOne, CoreSite Realty and QTS Realty Trust), “data centers” was the only one of the 16 NAREIT industry segments to show a positive gain for the first quarter of 2020, growing by 8.8%. Digital Realty Trust (DLR), the largest North American data center company, was the 7th best performing stock on the S&P 500 as of March 30th.
“This sort of technology sector of the market is continuing to perform pretty well, in spite of the pandemic,” a NAREIT spokesperson commented.
This performance boost for data centers may come as no surprise to anyone who has found themselves working (or socializing) virtually. Popular video conferencing platform Zoom went from 10 million daily meetings in December to over 200 million daily meetings in March. Comcast has reported its network traffic has increased by 32% since March 1, and the Data Center Frontier reported on an all-time traffic peak on the DE-CIX Frankfurt, one of the internet’s busiest interconnection hubs.
“What caused this [increase] is people stopped doing face-to-face interaction,” says NAREIT Senior Economist, Calvin Schnure. “Whether it’s shopping, video conferencing etc, we’re doing more by phone and internet communication. That’s likely spurring business for the data centers.“
While the immediate increase in remote work is certainly a boost to data centers, the largest opportunity for the industry may in fact be in migrating or scaling up existing customers during this time. Digital Realty recently launched a program to provide free additional ports to all “Government, Medical, Emergency Services, and Education verticals” for 6 months, providing both critical digital infrastructure for immediate essential services––as well as a potential future source of revenue.
Additionally, data centers appear well positioned for future growth in a post-Covid world. WiFi enabled appliances such as Ring doorbells and smart fridges have increased data needs, and there is a massive potential opportunity should autonomous vehicles become widespread.
“We’re fortunate to be in a business that is continuously pushed forward by different demand drivers,” says Digital Realty CEO Bill Stein.
The one downside to data center stocks is they may be a victim of their own success. In a deep bear market where highly touted stocks like Apple (AAPL) and Alphabet (GOOGL) are trading at, or near 52-week lows, data center companies like Digital Realty and Equinix (EQUIX) may present less upside opportunity.
However, this may be ultimately irrelevant as REITs are often selected for their stability and dividend payments, and are not often in direct portfolio competition with growth stocks. Many may in fact be viewing these troubling times as a stress test on their defensive stocks––and data centers appear to be passing.
And while the data sector may continue to be a rare positive for the REIT industry in the immediate future, investors might take comfort in the absence of deep structural issues that plagued the industry’s recovery following the mortgage collapse.
“In 2008, there was a lot of speculation and oversupply…there were defaults and a lot of losses.” commented Schnure. “We had $1.5 trillion in subprime mortgages owned by banks that were undercapitalized. Things were basically ready to collapse.”
According to Schnure, the REIT industry will likely take “months and months after the health crisis”to fully recover—however the underlying fundamentals are strong. Until then, real estate investors looking for glimmers of green in their portfolio may be wise to follow the data, literally.