Short-term versus long-term shifts
Among the four major property types—office, retail, industrial, and multifamily—office and retail clearly suffered—and are still struggling—from the pandemic. While grocery-anchored retail has started to come back, there are also signs the hybrid work-from-home (WFH) model is going to have a dampening effect on demand for the foreseeable future. Office is clearly in a transition period right now. For older buildings, their obsolescence has been accelerated due to the pandemic, but this may help new and modern buildings (e.g., those with LEED certifications).
On the other hand, industrial and multifamily have benefited greatly from the pandemic. There has been almost insatiable demand from occupiers of industrial buildings despite supply chain challenges. In the U.S., 2021 may be a record year for industrial as groups are trying to get merchandise out to consumers via Amazon, UPS, or similar services. Industrial will likely continue to exhibit strength as market fundamentals remain positive.
In multifamily, there has been a bit of a “haves and have nots” environment. Urban markets have struggled with the migration out of big cities like New York, Washington, D.C., and Chicago. It’s unclear if these population losses, mostly to the suburbs or to the south, are part of a longer-term paradigm shift. It’s very possible these are just short-term changes and over the longer-term people will return to these cities, which could bode well for urban apartments in the future. Regardless, multifamily has performed exceedingly well as a core asset or a development.
Inflationary pressures are going to impact different sectors in different ways. Property types with longer-term triple net leases may underperform inflation quite significantly. Shorter-duration apartments are attractive because they renew annually, and rents can reset. Hotels could be a good place in a rising inflationary environment, especially if there is a return to normal levels of business travel. Many of the non-traditional property types have ingrained demand drivers that will help them power through inflation. Life sciences, self-storage, and manufactured housing have experienced very strong rent growth. This is a structural shift that’s pushing occupiers towards these property types. In the coming 12 to 24 months, many non-traditional property types are poised to perform well.
Data centers and life sciences, as well as anything housing related, are growing in importance in real estate portfolios. These property types offer very compelling returns, particularly on the development side. For example, compared to multifamily, manufactured housing is experiencing similar rates of return with more potential growth opportunity and strong fundamentals. This effectively is creating higher total returns and double-digit IRRs with the conservative use of leverage.