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As market participants price in a broad economic recovery in the second half of this year, not all real estate investment trusts (REITs) will share equally in the growth, a CIBC analyst says.

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Industrial REITs have thrived during the pandemic with the acceleration of e-commerce, creating demand closer to cities for faster and cheaper delivery, said Trevor Bateman, vice-president of global fixed income, credit, at CIBC Asset Management.

Retail, office space and seniors’ housing have all lagged, though, he said in a late-January interview, and the recovery for those sectors remains uncertain.

Lockdowns to start the year have added to the pressure on “already stressed retailers,” he said. “And how that will impact REIT earnings and balance sheets is somewhat clouded.”

Retail rent collection, typically at about 100%, dropped to about 87% during the onset of the pandemic before rebounding in the third quarter, Bateman said. “I wouldn’t be surprised if we see a setback in the fourth quarter or the first quarter of 2021.”

The expansion of e-commerce will continue this year, he said, and retailers will require less space than in the past. “This trend was already in place pre-Covid,” Bateman said, “but the pandemic certainly accelerated that.”

As a result, some companies have cut their monthly distributions: RioCan REIT by one-third late last year, and First Capital REIT by half in January.

The impact on office space is unfolding more slowly, Bateman said. Vacancy rates in downtown Toronto jumped to 7% in the fourth quarter of 2020 compared to 2% a year earlier — a historically low figure. Revenue growth has fallen to about 1.8% from 3%.

But Bateman said office REITs are well placed to deal with the pandemic challenge.

“They started with a good position with low vacancies and good balance sheets,” he said. “Not all leases expire in 2021 — it will happen over a number of years — so management teams have time to adapt to a new office environment.”

Seniors’ housing has also been hit hard by Covid-19 as occupancy rates have risen. Almost three-quarters of Canadian deaths attributed to the pandemic (as of early January) were in long-term care and retirement homes.

“Until all residents and staff are vaccinated, I anticipate that occupancy will be weak,” Bateman said.

The outlook is brighter for industrial REITs, which have benefited from the e-commerce boom.

“Tenants have had to invest more in their complex logistics networks across the country,” Bateman said. “That means those industrial properties that are closer to the cities are more important than ever” as retailers try to reduce the “last mile” delivery costs.

While credit spreads in most sectors spiked early in the pandemic and have since recovered, spreads remain wide in real estate, Bateman said. He doesn’t expect to see a tightening until the outlook is clearer for retail and office REITs.

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