Can Current Uncertainty Yield Opportunities for Real Estate Investors?

Commercial Observer’s Partner Insights: After this year’s extraordinary events, what are your views on the viability of real estate as an asset class today?

Melissa Reagen: Numerous economic scenarios could arise in 2021, and the implications for real estate from each potential outcome are varied, so trying to peer into a crystal ball is ineffective.

Real estate is facing a K-shaped recovery: certain property types, such as warehouses, life sciences, single-family rentals, and self-storage are facing rising values and rents, while other property types, such as malls and lodging, are facing plummeting values and rents.

Still, the current spread between direct real estate cap rates and corporate bond yields is well-above the historical average — signaling real estate’s strong relative value. Most of us who have endured previous cycles remain optimistic and believe that new opportunities emerging from current circumstances will strengthen portfolios in the long run.

What opportunities do you believe will prove most attractive?

Pricing of certain sectors is likely to become more attractive as the pandemic endures. And we expect that the alternative property sectors are likely to become central to portfolios during the next decade.

Property types that can generate superior [net operating income] growth are going to play a significant role and will dovetail with trends being driven by the pandemic: a continued shift toward renting, a transformation of the U.S. health care system, and a rise in the digital economy.

Specifically, medical office, senior housing development, self-storage, data centers, life sciences, and single-family rentals are the alternative subsectors we are currently focused on, because their fundamental drivers are less tied to the economic factors that are so uncertain right now.

But with many investors already deeply embedded in primary sectors like office and retail, how should they manage the portfolios they own today?

Office and retail are certainly experiencing unprecedented challenges, yet they were under pressure to evolve pre-pandemic. I don’t doubt the viability of these sectors in the future — it just may come down to the asset level and be a survival of the fittest scenario, making property management, technology, and competitive insights more crucial than ever.

For instance, our office strategy embraces the growing demand for more flexible space and the well-being and health of the occupants. With retail, we are repositioning assets that can remain relevant and seeking to repurpose others.

An ideal portfolio today is a defensive portfolio, with long-term leases and high occupancy rates, along with low leverage to cushion volatility and downside risk. And yes, portfolios will need to shift over time to better balance retail and office exposure and avoid or limit exposure to hospitality, gaming, or leisure.

Cities have always been a central focus of your investment philosophy. How have current circumstances affected that view?

City life is certainly diminished due to restrictions on movement and travel; but as we are seeing with the current upsurge of the pandemic throughout the U.S., the virus is a global issue, and no location is immune. Therefore, we expect that over the medium to long term, the greater economic opportunities and the dynamism of cities will continue to make them attractive.

The factors we’ve always considered — such as urbanization, shifts in middle classes, generational dynamics, and digital drivers — are still relevant, while other factors — such as well-being and sustainability — may become more pertinent than ever. I suspect major cities will see rents and values reset in the near term, but this will also usher in a new, and perhaps more vibrant, era for major cities across the world.

What is the most influential factor in real estate for 2021 and beyond?

Technology. It is fundamentally changing the way consumers and businesses behave, their real estate needs, and how they want to interact with the built environment. 

These ‘technological disruptors’ include the well-known, but ever-changing e-commerce, but also the less-often considered ones, such as transport.

For instance, how will autonomous vehicles and ride-hailing affect how parking is used?  And smart buildings — how can the advent of 5G, the ‘internet of things,’ and artificial intelligence make properties more operationally efficient and enhance user experience?

There are no simple answers, but we expect these factors to accelerate in their application to real estate. As investors, we need to have a deep understanding of these trends before they become mainstream, so we can leverage them to create value and maintain competitive assets.

For more information, please visit the real estate page on Nuveen.com.

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