Real Estate Disruptions Accelerate Active Opportunities

by Stephen Dover of Franklin Templeton Investments, 12/17/20

Real estate is no exception to COVID-19’s disruptions, accelerating trends, and shifting how we live, consume, and work. Onay Payne, Managing Director of Clarion Partners, LLC, and I recently discussed reshoring supply chains, evolving office space and housing needs, and our changing consumption preferences. All create active investment opportunities:

  • Real estate offers diversification benefits and a possible steady stream of income. Eight to 10% of many institutional investors’ portfolios are invested in real estate.1
  • Industrial warehouses and multifamily apartments have not experienced the same level of disruption as several other real estate sectors. Both industrial and multifamily apartment sectors continue to collect rents and renew leases. E-commerce demand has bolstered demand for warehouse space, and many multifamily apartment renters have likely benefited from support from fiscal stimuli and unemployment insurance.
  • Affordable housing offers compelling investment and return opportunities, in our opinion, because affordable housing in high-cost cities remains drastically undersupplied.
  • Real estate in major metropolitan cities (“metros”) will likely grow in demand as life normalizes, but they are experiencing exit-migration now with demand-drivers for “urban fringe” and prime suburban locations offering better quality of life and cost of living.
  • Some retail will continue to be more impacted, e.g., regional malls experiencing structural shifts in demand driven by increasing e-commerce. Parts of the retail sector that offer more inelastic forms of demand, e.g., grocery anchors and retail neighborhood centers offering general services, will not be impacted as much as big-box retailers.
  • The pandemic’s impacts create a recovery for those who work remotely or service e-commerce. Jobs that have not been regained have disproportionately affected women and people of color. There’s a whole part of the US middle class whose needs are not being adequately addressed from a housing and retail perspective.

Now and post-pandemic, commercial real estate addresses the daily needs of the majority of our population. We believe for investors, characteristics such as durable income with appreciation, lack of correlation with common stocks, and leases indexed to inflation make commercial real estate useful for long-term investment strategies.