Where to Invest in Real Estate Right Now, and Where Not to, Say 2 CIOs

April 21, 2021 Beth McCandry

Data centers and infrastructure are promising. Offices aren’t, but the situation there may not be as bad as many fear. Maybe the urban centers aren’t going down the slide after all. Some retail stores will be fine. Forget about farmland.

This is one of the most insightful observations from the latest episode of the CIO in our 2021 Asset Allocator Series. With institutional investors looking for opportunities that weren’t correlated to stocks but offered better returns than fixed income at low interest rates, the real estate and property focused session was a wealth of useful information.

The webinar held on Tuesday attended two wealth managers with strong real estate expertise: Farouki Majeed, CIO of the School Employees Retirement System (SERS) in Ohio, and Monte Tarbox, Executive Director, Investments, for the National Electrical Benefit Fund (NEBF). . The moderator was Christine Giordano, managing editor of the CIO.

For Tarbox, real estate is “the best diversifier” and he expects the allocation in its $ 16 billion portfolio (already 17% of the total fund) to remain stable over the coming years. “Especially when we have another decade of low interest rates,” he added. In addition to the existing obligations for real estate, his fund should also increase the allocation to the infrastructure.

In addition to the lack of correlation between real estate and the stock market, Majeed pointed out the “stable income” of this most material asset class.

Data centers are all the rage right now as the US and the world become increasingly digital. “Without data centers, our core real estate portfolio would have been negative in 2020,” said Tarbox. For the same reason, he admitted that there was still a risk of a superstructure.

In the future, it may be possible to transmit more data over existing fiber optic cables and other feed lines, he said. “Just because the demand for Internet services increases,” he said, “you don’t assume that the supply of Internet facilities has to increase in a linear fashion.” Tarbox referred to the history of the railways, which expanded enormously in the 19th century, only to face a tremor later.

Infrastructure has had some great returns in the past few years, say 10% per year over the past decade, Majeed said. Toll roads and seaports suffered during the pandemic, but their performance prompted him to increase Infra’s stake in his $ 14.6 billion portfolio during his nine-year tenure as head of the retirement plan.

Majeed’s fund is primarily US focused on the US, with only 15% outside that country, mainly in Europe. Nonetheless, this “broadening of possibilities” means that it is advisable to “take a global approach” as there are more opportunities abroad. President Joe Biden’s infrastructure proposal, if it goes into effect, could change that dynamic somewhat, he conceded. Tarbox supports the president’s infrastructure proposal, but is unsure of the opportunities for private investment.

The two CIOs noted that the offices were in a problematic position while talking about reducing footprint in a work-from-home ethos created by the virus. Majeed envisages a “trophy property transition” in major cities like New York and Chicago, and possibly less space for office workers. On the flip side, increasing the spaces between desks could be a factor that would force some office tenants to need even more space, he noted.

For his part, Tarbox was skeptical that the downtown office market was in big trouble. “As soon as the health crisis is over, people will want to go back to the office,” he said. “Everyone is getting tired of working from home”, especially “younger employees with children”. For any company that is reducing its demand for office space, there seem to be others increasing their footprint. “We don’t have any clarity about the trend yet,” he said.

According to Tarbox, sub-tenant leasing has decreased recently in central business districts, but much of it can be attributed to the usual aftermath of a recession – businesses go out of business. While he doubted office demand would collapse, he predicted that “valuation models will need to be recalibrated,” with slower rent increases that could result in the short term

Tarbox advised investors, when conducting their property due diligence, to examine the types of tenants in an office building. The office market “isn’t monolithic,” he said. For example, if tenants are retail managers, they may be more precarious than a law firm.

In terms of urban decline, Tarbox noted “no discernible trend”. Anecdotally, he said he had heard as many stories from people who left the cities for the suburbs as vice versa. “Maybe they can wave to each other as they walk by,” he quipped.

On the retail side, Majeed said the forecast depends on the type of asset. Malls with drug stores and supermarkets should be fine, he said. But “mega-shopping centers need to be repositioned,” he said, with some of their space devoted to other uses such as housing.

While farmland has attracted attention in some investment circles these days, both panelists called it a bad investment. Those piling up in farmland may find “this is not a good thing,” Majeed said, calling it “overpriced”.

Farming is “very difficult” for Tarbox, whose family members were farmers in previous generations. In fact, he said, “The way to make a small fortune in agriculture is to start with a great fortune.”

Although some analysts have blamed the pandemic for the upward movement of many economic truths, Tarbox said COVID-19 was merely “accelerating trends.”

Real Estate News 24

Real Estate News 24

Where to Invest in Real Estate Right Now, and Where Not to, Say 2 CIOs