Real Estate as a Paradigm for Economic Recovery

Advice to the Advisors

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Real Estate as a Paradigm for Economic Recovery

What didn’t cause the recession is perhaps more important to study than what did, nareit.com writes, positing that the recent recession was caused by dramatic changes in consumer behavior linked to business shutdowns, travel restrictions, and social distancing during the pandemic.”

J.R. Humphreys of Sheaff Brock Institutional Group agrees, adding that just as the recession was not caused by internal weaknesses in the economy, the post-pandemic upwards direction in the price of most categories of real estate is not entirely driven by the general economic recovery, but rather by two primary factors:

  1. investor concerns about inflation
  2. the potential for rising interest rates

Humphreys ends every presentation with a reminder that real estate is an asset class that “has everything to offer,” including the potential for both rising dividend yields and capital appreciation. Inflation? Real estate investments serve as an inflation hedge, Humphreys explains (as the cost to replace structures rises, the value of existing buildings goes up.) In addition, since by law, REITS are obligated to pass 90% of earnings along to shareholders, they are particularly attractive to investors seeking current income along with growth potential.

Different categories of real estate investment have been affected by the general economic recovery in different ways, nareit.com goes on to say, with those parts of the economy requiring more interpersonal interaction slower to recover.

  • Apartment buildings
    Strong migration away from both east and west coast cities and into “sunbelt” areas (Nashville, Charlotte, Arizona and Florida locations) with cheaper labor and more favorable governance has led to a wave of new apartment construction.
  • Retail centers
    Shopping malls have begun to rebound at a fast clip.
  • Office buildings
    Rents are beginning to stabilize as workers begin a slow return to the office.
  • Medical buildings
    Long term leases, many containing “escalator clauses” keyed to inflation, have continued to raise the value of existing facilities.
  • Healthcare facilities (senior living and skilled nursing facilities)
    These experienced significant weakening during the pandemic and face a longer recovery.
  • Cell towers 
    Expanding 5G technology continues to generate a demand for real estate space.
  • Server farms
    The ever-increasing need for cloud storage of data (for both personal and business use continues to enhance the value of “server farms,” whose landlords provide cooling for the vast banks of computer data processing systems.
  • Warehouses
    This segment of the real estate market has been maintaining value, still lagging behind the momentum of other segments.
  • Travel and entertainment venues
    These areas of the economy are just beginning to show evidence of a recovery.

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As is true in other areas of investment, diversification is key when investing in real estate, J.R. Humphreys reminds readers. Nareit.com offers additional encouragement: “The pandemic recession, in contrast, was caused by an external shock to an otherwise healthy economy… many of the underlying fundamentals of the U.S. economy remain sound, and may be able to recover more quickly once the pandemic is brought under control.”

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