Roughly a year ago, Activist Insight Online predicted the real estate sector would see an increase in activism due to the excessive impact of the pandemic on REIT stocks. On April 24, 2020, shortly after a broad market selloff hit some REITs hard, we said: “Amid this crisis, it is not difficult to see how the battered REIT stocks could create an opportunity for activist investors. While secular prospects for mall REITs might not be attractive, opportunities may be simmering in the healthier corners of the market.”

That prediction appears to be coming true.

What is the trend?

Indeed, the recovery in real estate activism over the past 12 months has been spectacular. According to Activist Insight Online data, 44 companies were publicly subjected to activist demands globally in 2020, up from 33 in 2019. The U.S., Europe, and Asia all saw absolute increases in the number of real estate companies targeted, even as activism overall declined substantially.

This year is off to a strong start, with 13 real estate companies subjected to activist demands versus 15 for the same period last year. So far, the bulk of 2021 campaigns were launched in the U.S. – eight companies have been targeted, up from seven during the same period last year.

Why is it happening?

“The pandemic aided a perfect storm for REIT activism,” said Andrew Freedman, co-chair of Olshan Frome Wolosky’s shareholder activism group. Some REITs have been disproportionately hit by stay-at-home orders, creating large discounts. Combined with some having “highly suspect governance structures,” this created the perfect recipe for activism, Freedman noted.

Indeed, real estate stocks were hit harder than the rest of the market during the COVID-19 selloff, partly because some sectors like offices and malls were deserted. Vanguard’s Real Estate Index Fund ETF lost 40% in one month through March 20, 2020. The S&P 500 Index shed 31% during the same period. And while the broad market already sits higher than before the pandemic, real estate equities have yet to recover their former value, although the gap is closing.

In addition to opportunities created by discounts, investors have gotten more vociferous with their holdings due to dissatisfaction about how real estate companies managed the crisis. Indeed, nine companies were targeted with demands related to business strategy, which includes cost cuts and management replacements, a recent record exceeding the seven companies targeted in 2015.

Asset sales have also been high in the list of demands, with Ashford Hospitality, Apartment Investment and Management Company, and Frontyard Residential among the REITs receiving such requests. “Right now, cutting loose non-core or underperforming real estate groups within a REIT is an obvious ask from an activist standpoint,” Freedman said.

So far, activists appear to have avoided the most-hit parts of the REIT sector. According to Activist Insight Online, the number of companies targeted in hotel, office, and retail space reached a low of seven, the lowest since 2013. “Activists have focused on what could be considered defensive REITs, particularly the parts of the sector that were not affected by the pandemic,” Aneliya Crawford, co-head of activism defense at UBS, said in an interview with Activist Insight Online.

Who is making it happen?

The rise in activity was underpinned by generalist activists venturing in the sector and occasional activists rather than specialists. Specialized REIT activists like Land & Buildings, Blackwells Capital, and Sandpiper Group were less active in 2020 than in previous years.

Land & Buildings targeted three real estate companies in 2020, down from two in 2019; Blackwells two companies, same as last year; and Sandpiper ran one campaign. Meanwhile, Elliott Management targeted two REITs in 2020, namely Public Storage and Crown Castle International, the first time it publicly targeted a U.S. REIT since 2017. Smaller activists like Engine Capital and Browning West tested the sector in 2020, with campaigns at CIM Commercial Trust and U.K.-based Countryside, respectively.

Yet a larger part of the increased activity was driven by investors that use the activism strategy occasionally. Dedicated activists targeted 16 companies in 2020, two more than in 2019. Meanwhile, occasional activists and concerned shareholders targeted 21 real estate companies last year, up from 16 in 2019. Dedicated activists are more active this year, advancing requests at seven companies versus four in the same period last year.

How sustainable is the trend?

While activists have so far stayed away from REITs that have suffered from the pandemic, the next bout of activity could be in these hard-hit sectors, particularly as the economy opens and some REITs still trade at large discounts.

“There will be niche sectors within the REIT space that are going to continue to draw the attention of activists, especially the sectors that are most affected by the lingering effects of the pandemic, like commercial and office space,” Freedman said.