To Inform:

We’ve been hearing a lot of questions and concerns about real estate from clients and friends. It may have something to do with some of the headlines in the media. The crux of the concern is reflected in these recent magazine covers:

Strategas Research Partners

With so many office buildings in major cities sitting with empty space, what is going to happen when leases are renewed? And what will happen to any debt borrowed against these buildings?

While these concerns are valid, they exist in sharp contrast to the mood of the manager of a real estate mutual fund who I (Travis) recently had breakfast with. “I feel like a kid in a candy store!  There are so many opportunities in publicly traded real estate right now – there lots of property owners in different sectors with pricing power and that’s great for investors.”

So, what gives? How do we reconcile the dire headlines with the excitement of the fund manager? We believe the answer is relatively simple: not all commercial and publicly traded REITs are office properties.

Below is a chart of the components of the FTSE NAREIT Real Estate Index. Although the chart is more than a month old, the components don’t change frequently so the data remains relevant. Investors may be surprised to know office properties only make up 4.5% of the index…much bigger components include Industrial, Retail, Residential, and Health Care sectors.

Source: Russell Investments

Publicly traded real estate (Real Estate Investment Trusts, or REITs) is an important component of the Real Asset sleeve in certain portfolio strategies we have the privilege of managing on behalf of our clients. The idea behind this Real Asset sleeve is to combine asset classes which historically have exhibited sensitivity to inflation, (including REITs, along with commodities and infrastructure) in an effort to create an allocation with attractive risk adjusted returns, diversification from traditional stocks and bonds, and a potential hedge against inflation.

We recently did a deep dive into the makeup of an actively managed global REIT fund which has an excellent long-term track record within the category. While we cannot name specific holdings, here are examples of major themes we found within the fund:

• Warehouses and logistics facilities supporting eCommerce
• Data centers/digital infrastructure
• Luxury apartments and multi-family housing
• Self-storage
• Nursing homes/assisted living centers

Bottom line, when it comes to the current real estate market, there is more happening in the world than the current headlines may indicate. Successful real estate investors always have LOTS to think about.

Written by Travis Upton, Partner, CEO and Chief Wealth Planning Officer