Challenges and Opportunities Within Commercial Real Estate

Jeb and I also discussed which macro themes will likely drive future performance. “We’ve identified five major themes that we think are playing out across all sorts of asset classes, including real estate, that are extremely important,” he told me. The five themes are demographics, technology, deglobalization, housing shortages and climate change (Exhibit 2). These themes impact several sectors of the real estate market.

Exhibit 2: Macro Themes Impacting the Real Estate Market

1. Demographics will likely impact multiple sectors in the coming years. The Millennials and Gen Z cohorts are in their prime spending years and will need to find affordable housing. This should provide an economic boost. At the other end of the spectrum, baby boomers are retiring, and many in the United States are moving to the south and southwest part of the country.

2. Technology represents another big theme, according to Jeb. “We’ve all seen the incredible pace of technological change over the last 15 or 20 years that continues [to affect] our world,” he said. Within real estate, Jeb noted, “A basic technological change that we may take for granted now is the rise of ecommerce and how that has had such a profound effect on how we shop and how we get goods and where those goods flow through real estate.”

3. The third theme is deglobalization, which will lead to the movement of supply chains back to the United States. Ultimately, manufacturing and warehousing will need more facilities and more labor, leading to economic growth.

4. The fourth theme is housing shortages. Jeb estimates that there is a shortage of three million to five million units in the United States. The last few decades have seen dramatic underbuilding, which impacts supply, affordability, and where and how people live (apartments and multifamily).

5. The last theme is climate change. Climate change impacts real estate along the coast and across America. “If you want to have real estate that is as leasable as possible to the maximum array of tenants, you’re going to want to pay attention to the characteristics that those tenants want. One of those are healthier, greener buildings,” said Jeb.

To learn more about alternative allocations please visit alternativesbyft.com. To listen to this episode and others, please visit alternativeallocationspodcast.com.

Please note that Clarion Partners now refers to the themes of “technology” as “innovation”, “deglobalization” as “shifting globalization”, and “climate change” as “resiliency”. Despite these name changes, the themes discussed throughout the podcast and messaging around each theme remains the same.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.

Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.

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