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.
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.
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.
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.
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