Real Estate Stocks Enter Long-Term Downtrends

The coronavirus pandemic will affect real estate investment trust (REIT) stocks and the real estate market for months or years to come, with commercial and multi-dwelling landlords defaulting on bank loans when their tenants no longer have income to pay their rents. Many homeowners will also feel the pain, missing mortgage payments and potentially losing their homes when employers permanently shed workers as a result of the economic downturn.

Healthy dividends are unlikely to slow damage to REITs, especially for companies that own and lease retail properties. This destruction could expand into industrial real estate, with an economic contraction lowering the demand for factory and fabrication space. On the flip side, health-care REITs with no senior housing exposure could prosper in this environment, with capital flooding into medical practices that are fighting the epidemic.

The iShares U.S. Real Estate ETF (IYR) came public in 2000 and entered a strong uptrend that topped out at $94.99 in 2007, ahead of a steady downtick that accelerated during the 2008 economic collapse. It posted an all-time low at $20.98 in March 2009 and turned higher into the new decade, topping out at the .786 Fibonacci selloff retracement level in 2015. It tested that harmonic barrier for four years, finally breaking out in in the second quarter of 2019.

The uptick completed a 100% retracement into the 2007 high in October 2019 and surged into the triple digits, posting an all-time high at $100.75, ahead of a crushing decline that failed the multi-decade breakout in February. The sell-off ended on March 23 at an eight-year low, triggering a bounce that has stalled under the .50 sell-off retracement of the 2007 to 2009 downtrend but well below the .382 retracement of the 2020 decline.

Meanwhile, the monthly stochastic oscillator has just reached the oversold line after a sell cycle that started from the overbought zone in December 2019. Unfortunately, this placement often precedes the most aggressive selling pressure in a decline, raising the odds that the March low will get tested and possibly broken, yielding a secondary downswing that may find support near the 2011 low in the mid-$40s.

Physicians Realty Trust (DOC) owns and leases large medical facilities throughout the United States. It holds no senior housing or nursing care facilities. The stock came public at $11.50 in July 2013 and posted an all-time low at $11.00 one month later, ahead of an uptrend that stalled in the upper teens in 2015. A 2016 breakout hit an all-time high at $22.03 in September 2016, giving way to a multi-wave decline that found support within a point of the 2015 low in March 2018.

A recovery off the low posted a lower high in February 2020, giving way to a vertical decline that ended just a penny above the 2013 low on March 19. The bounce into April reversed at the January 2019 low last week, setting the stage for range-bound action that could persist until the trajectory of the pandemic becomes transparent. In the meantime, the 100% retracement signals strong support that could eventually mark a tradable low.

This is a tricky scenario for investors. The REIT pays a hefty 6.94% forward dividend yield that could sustain bottom fishers in coming weeks, but it has shown little divergence from other types of REITs that face considerably greater challenges in future quarters. Medical practices show great reliance during periods of economic contraction, so the market could be getting it wrong, but there's little sense in fighting the tape until price action improves.

The Bottom Line

REITs and real estate could face prolonged downturns as a result of the pandemic, but specific sub-groups may prosper in the adverse environment.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.