Where Are The Bright Lights?

On yesterday’s show I spoke about using the energy of the market to aid you in your quest. Use the energy of the market to your advantage as you evolve your investment strategy.

On today’s show we’re going to look at a few asset types that we believe are eventually going to do well once through this period and once this pandemic recedes and we are into a recovery phase.

My analysis of various segments of the market show that some sectors are feeling tremendous pressure, and others are just ticking along like nothing has happened.

The ones that are doing poorly are will probably come as no surprise. But even in these segments, there are some bright lights.

The worst performing asset class right now is hospitality. Hotel occupancies across North America are averaging below 10%. According to a report from Colliers, most hotels have laid off much of their staff and are either closed completely, or are operating on a skeleton staff.

Short term rentals are a segment that overall have been hard hit. We’ve seen some announcements from AirBnB in recent days of large workforce reductions and cost cutting measures in response to the fall in bookings. But some short term rentals have done surprisingly well. In those locations, they’ve filled a particular need. Our own portfolio of short vacation rentals had very low occupancy in April, which in a normal year would also have very low occupancy. April is between seasons in the mountains. It’s after ski season has shut down and before the summer vacation season. As of last weekend, we’ve seen a flurry of bookings as lockdown orders have been relaxed. 

Retail store front real estate is also struggling. The social distancing requirements have closed down most non-essential businesses. This includes clothing stores, restaurants, bars, many primary health care locations including dental clinics, massage therapists, and hair stylists. We’ve seen a 50% drop in our commercial rent collections.

Commercial office space is also struggling. This is particularly true in the co-working office model. These businesses operate on very thin margins because their operating costs are high, higher than regular office space because they carry more staff.

Many companies are re-examining their office space as they’ve continued to operate with large parts of their workforce remote.

Residential multi-family continues to do well. But the huge impact to the economy means that many having lost their primary source of income will eventually lose the means to pay rent. Unemployment benefits are closing the gap. But the moratorium on evictions could have the effect of encouraging non-payment of rent. Multi-family remains a good asset class, but the degree of leverage will determine how well these assets perform under these challenging market conditions.

There are three asset classes that are actually performing as if nothing has happened.

Warehouse and distribution centres that serve essential businesses continue to do well. These include grocers, online retailers that have been less impacted by the shutdown. Online retail sales are up 10% year over year in March as residents leverage deliveries to purchase essentials to set up home offices.

The operators I’ve spoken with in the Self Storage segment have seen no measurable drop in rent collection. That doesn’t mean this segment is fully insulated. If people are looking to cut costs, this might eventually become an area of cost cutting. But for the moment, it has not been the first to be cut.

Boat and RV Storage also continues to operate with no measurable change. This might change if and when people look to sell their boats or RVs in order to raise cash. But even if they sell, the boats and RV’s still exist and will simply change hands.

There are other asset classes that we have not analyzed yet. But for the moment, these are an initial analysis of the landscape.