Real Estate Assets to Consider Investing in Right Now
At the onset of the COVID-19 pandemic, there were real fears as to how commercial real estate would fare. The economy was in turmoil, businesses shuttered, and the risk of default was high. Yet today, more than two years later, commercial real estate has proven to be an investment darling. Due in large part to the action taken by the Fed and the U.S. Treasury to support the economy, the CRE industry has emerged from the pandemic largely unscathed.
Today, with inflation surging, commercial real estate remains well-positioned to outperform other asset classes.
Yet not all property types are expected to fare equally. Many would-be buyers have been asking which real estate asset classes they should invest in given current market dynamics (i.e. low inventory, rising interest rates, rising construction costs, inflation, labor shortages, and some lingering COVID uncertainties).
Here is our take on what we believe to be some of the best real estate assets to invest in right now.
Top Real Estate Assets to Consider Buying Today
Demand for multifamily housing continues to be at all-time highs, among renters and investors alike. Post-pandemic job creation has fueled renter demand for multifamily. In turn, leasing volume has increased in most major metro areas, including New York, Los Angeles, Chicago, the Sun Belt, Dallas-Fort Worth, Houston, and Phoenix.
In most markets, rents have recovered to pre-pandemic levels. Low inventory has allowed owners to push rents further, often by double-digits. In the nation’s top 16 metro areas, rents had increased a staggering 17.3% between March 2020 and March 2022.
Multifamily is expected to continue performing well, even amid concerns over rising inflation. One reason for this is that apartments generally turn over on an annual basis, allowing owners to increase rents at least as much as or more than any escalation in the consumer price index (CPI)—the most common measure of inflation. By raising rents, something that is relatively easy to do given the current supply/demand imbalance, multifamily owners are able to preserve their cash flow.
Industrial continues to be a bright light within the CRE industry. According to the NCREIF Property Index, industrial outperformed all other asset classes between Q4 2020 and Q3 2021. During this time, industrial posted a staggering 32.4 percent annualized return – more than two and a half times the returns posted by the next highest-performing asset class, which was multifamily at 13.4 percent. Industrial vacancies remain low despite record new supply, with net absorptions hitting a new record in every quarter of 2021. What’s more, rents continue to surge as tenants compete for strategic supply chain advantages. E-commerce and shifting supply chains are expected to propel industrial assets to new heights in the months and years to come, making this one sector for every investor to consider adding to their portfolio.
- Senior Housing
During the first four quarters of the pandemic, an estimated 44,000 units of senior housing were vacated. COVID had a dramatic impact on senior housing, but it has since rebounded: in the second half of 2021, more than two-thirds of relinquished units (approximately 30,000 apartments) had been re-leased. The pace of move-ins now exceeds pre-pandemic levels, which bodes well for the sector moving forward.
Senior housing has strong underlying fundamentals: America’s aging population translates into more people needing varying degrees of care as they grow older. In addition to new demand, there remains pent-up demand for the care services that senior housing communities provide. Well-located, stabilized senior housing communities are increasingly able to drive rents now that the worst of the pandemic has subsided.
- Manufactured Housing
According to a recent analysis by Marcus & Millichap, “strengthening incomes are bolstering household formations and driving demand for rentals in manufactured home communities.” There has been little new construction in recent years, which has put upward pressure on rents.
The outlook for manufactured housing remains strong moving forward. It is an asset class that has proved resilient during past periods of tightening monetary policy—as is the case now with the Fed raising interest rates. For example, between December 2015 and December 2017, the Fed raised the lending rate by 225 basis points. During this time, sales velocity and sales prices for manufactured housing continued to climb. Cap rates also compressed, an indication that the higher costs of capital did not outweigh the demand for manufactured housing.
Real Estate Assets Worth Selective Consideration
- Single-Tenant NNN
Properties with a strong, single-tenant in a long-term, triple net (NNN) lease are often considered one of the best investments to own in a down market. They have the potential to provide consistent, stable, and predictable income. However, in an inflationary environment like we’re in today, single-tenant NNN properties are somewhat riskier. While most NNN leases are structured to include annual rent escalations, unless those escalations are tied to at least the rise in the Consumer Price Index (CPI), then landlords may be leaving money on the table.
In reality, most NNN leases only escalate by 1 to 2 percent per year, which makes the value of the property and/or its cash flow less when faced with sky-high inflation.
That said, now could be a good time to strategically invest in single-tenant NNN properties. Some retailers, such as Chick-Fil-A, weathered the pandemic by shifting to drive-thru, and have since reopened in-store dining with great success. National pharmacies, like CVS and Walgreens, also remain attractive to many investors. These brands have been able to adapt by offering a limited scope of in-house primary care services, which may further strengthen these historically stable tenants.
The future of traditional office remains a mixed bag. Omicron proved to be a setback at a time when office leasing volume was just starting to pick up again post-pandemic. Omicron interrupted this positive trend, raising vacancy rates in central business districts by an estimated 30 basis points in the first quarter of 2022, according to a recent analysis. Vacancy rates in downtown areas was above 17 percent at the beginning of the year, followed closely by suburban office where vacancy rates remain close to 15 percent.
The tech industry continues to be the primary driver of traditional office, with Facebook, Apple, Amazon, and Google among the major names that have increased their office space this past year. Those who believe the tech sector has room to run could be bullish on office; others may be wary. The general sentiment is that Class A office is positioned to fare better than Class B or C properties in the near-term, with owners increasingly investing in the amenities office buildings will need in order to lure employees back on-site.
Oil and Gas: An Alternative “Alternative” to Real Estate
While we remain particularly bullish on commercial real estate, it is worth noting that there are other alternative asset classes that historically perform well during periods of rapid inflation. Oil and gas is one such sector.
Oil prices bottomed out in April 2020 and for a short period, were trading at negative numbers. Oil prices have more than recovered since then, reaching new highs earlier this year. Exxon and Chevron are among the companies whose earnings are surging as a result. Exxon profits, for example, more than doubled in Q1 2022 compared to the same time last year.
Rising prices may continue to be sustained, we believe, by the industry’s strong underlying fundamentals. In short, production of U.S. shale remains well below demand; OPEC members are not maxing out their production capacity; and the global “super majors” like Shell and BP are facing growing pressure to reach net-zero by 2050 (and in turn, are slowing their own oil production in favor of investing in alternative energy like offshore wind).
For these reasons, yield-seeking investors, and/or those looking to diversify their portfolios, might be well served to consider investing in oil and gas this year.
One of the reasons people are drawn to commercial real estate, especially during periods of extreme inflation, is that the asset class has traditionally had little correlation with more traditional stocks and bonds. What’s more, real estate has historically outperformed other asset classes during times like this. However, investors should carefully consider which real estate assets in which to invest. Multifamily, industrial, senior housing and manufactured housing continue to be where we’re focused—with strategic investments in core NNN assets, as opportunities arise. Are you interested in investing in institutional-quality real estate? Contact Perch Wealth today to learn more about our current and future offerings.
Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
1031 Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits