Millions of people are now working from home due to COVID-19. The Wiser team discusses the pros and cons of our new work environments and how working from home is affecting investment portfolios. Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio and have seen changes since the onset of coronavirus. The team also discusses companies and industries that will benefit from the working from home trend.
“Are we working from home or at home trying to get work done?”
When stay at home orders were put into effect during the Covid-19 pandemic, many companies were forced to have employees work remotely. Work from home, or WFH, has been accelerated due to the recent pandemic, and has raised many new questions that companies and business owners must ask themselves. Are my employees just as productive from home as they are in the office? How will my relationship with my employees and customers be affected by this new way of doing business? Ultimately, there are pros and cons for both the employer and employee. Working from home has proven America’s ability to adapt and transition to a different work environment with the help of new technology, such as the well-known Zoom meetings. Needless to say, work from home has altered many aspects of our life, from elimination of the dreaded morning commute to changing our homes with the new need for a functional home office and consequently, the ripple effect of all of this has been shown to impact our portfolios as well.
When looking at investments, it is believed that half of the world’s wealth is in real estate holdings. By choosing to exclude real estate from one’s portfolio, the investor is ultimately missing out on a significant portion of potential investment opportunities. Real Estate Investment Trusts (REITs) provide the investor an easy way to invest in a publicly traded real estate company. Two notable requirements of a company with REIT status include that 75% of their total income needs to come from real estate operations and 90% of the income received from rentals/royalties have to be paid out to the shareholders. The popularity of REITs is due to the diversified return stream (non-correlated returns) which is one aspect of a successful portfolio. In 2019, it is estimated that 50% of a typical REIT is made up of retail, office space and industrial real estate. The other half is dedicated to more specialized real estate, which includes timber/farmland, data centers and cell towers.
As a whole, REITs have largely been sold off due to Covid-19. Although they are showing signs of recovery, they are not seeing the same improvement compared to other industries, such as technology. The main reason for the selloff is the uncertainty/delay of lease payments, and as a result from that, possible evictions of tenants. Another aspect that seems up in the air is the possibility of companies no longer occupying multiple levels of an office building, as more employees take advantage of the ability to work from home. On the flip side, companies that do encourage employees to return to the office, are choosing to adapt to a more modern shared workspace layout, which would require building renovations/construction to meet these new needs. Despite these recent concerns and volatility affecting REITs, it is important to remember that they are known for being a stable, long-term investment. Especially when taking into account today’s low interest rate environment, they are proven to have a high yield when compared to the treasury. Based on academic research, it is suggested that a portfolio should have somewhere between 5-15% allocation dedicated to real estate, while taking into account the objective of the individual portfolio.
Shifting from real estate to technology, one may not realize the relationship these two industries have with one another. For example, the increase in data centers in order to house large servers and necessary data equipment has played a huge role in the rise of new real estate. Today, more than ever, technology has become a necessity for nearly every industry. Touching back on the idea of work from home, the number one reason we, as Americans, have been able to almost flawlessly transition into this new workstyle is all because of today’s technology and “the cloud.” As the economy begins to open back up in phases, it will be interesting to see how different companies integrate this newfound appreciation for working from home, the technology that supports it, and how that will ultimately affect the company’s original office space and employee productivity.