How Real are Real Asset Strategies?

July 14, 2021

The COVID-19 pandemic set off a rush for real assets, as investors ran for the safety of precious metals and other commodities. Silver ended up as 2020’s top-performing asset, up 47.4% for the year and 127.4% from its low in March, while gold prices soared by 24.6%. Commodities, in general, finished the year down 6.6%, but that loss masked an 87% recovery from lows set in April when oil prices briefly dipped into negative territory.

That kind of outsize gain draws attention—and investor dollars—to an asset class that has long been overshadowed by equities. But as asset managers seek a foothold in real assets, it might be time to consider real estate, an asset class that offers not only the potential for price gains but also something perhaps even more sought after in our uncertain and yield-starved world: income and relative stability.

Real estate? I can hear you scoffing. Haven’t office buildings been killed as remote work goes mainstream? Weren’t residential real estate owners facing a tsunami of missed or late payments, with $1 billion in unpaid rent in New York City alone? And yes, times are tough in a number of sectors of the real estate business, but others are surprisingly resilient.

For instance, existing home sales reached their highest level since the Great Recession with 5.64 million sold in 2020, up 5.6% from 2019. Heightened demand pushed prices up 12.9% to a median of $309,800.

Opportunities are also strong in certain niche areas. As consumers switched from in-person shopping to online retail, e-commerce sales surged by 44.5%, which drove strong demand for warehousing space. The leading commercial real estate firm CBRE estimates that every $1 billion in additional e-commerce sales creates a demand for 1.25 million square feet of warehouse space.

Self-storage is another growth area, as a global contingent of baby boomers continues to downsize into smaller, more affordable living spaces. Mordor Intelligence projects that a market currently valued at just under $41 billion will grow to about $54 billion by 2026, a CAGR of 4.79%.

And finally, properties anchored by grocery stores have held their value exceptionally well during the pandemic. People have to eat, even at the worst of times, and with restaurants scrambling for employees and indoor dining lacking desirability in many localities, many people are still eating at home. As a result, even as other retail sectors collapsed during the advent of COVID, essential retailers (including grocers) saw sales soar by 36% in March 2020, according to Bank of America. Sales have remained strong even as stay-at-home restrictions have loosened. Though rents have plummeted in other sectors of the commercial real estate market, grocery-anchored shopping centers have proved an exception. Moody’s REIS, a real estate analytics firm, estimated that neighborhood and community shopping centers have seen declines of only 0.5% to 0.6% in the second quarter. And watch hotels rebound this summer, with certain niche subsectors of hospitality real estate shining brighter than others (think nicer limited service hotels of well-known brands).

These are all very high-potential areas of the real estate market, which offer the same low correlations to public markets as other commodities, with one major difference: income. That’s where real estate brings together two powerful trends—the increasing popularity of real assets and the need for income. Because unlike gold or bitcoin or wheat futures, most real estate investments generate a steady, predictable flow of “preferred returns,” or essentially shared income before the manager can take profits. That income is generally higher than what investors can obtain from similar-quality bonds.

For individuals and wealth managers seeking to capture cash flows, these niche sectors in real estate offer a nearly unbeatable combination of real assets’ diversification and high income, but there is some education required. Individual investors—and, to some extent, institutions as well—are less familiar with real estate sectors than they are with public market investments, and they need some hand-holding to get comfortable. But with a well-targeted investment strategy and appropriate marketing, these funds can attract significant assets. They can be accessed by REITs, but now Reg D (only for accredited investors) and Reg A+ offerings (open to everyone) have been making quality deals available directly to consumers, and through advisors.

They’re real assets, backed by brick-and-mortar buildings and operating businesses, and they generate real returns that are not very closely tied to the stock market’s ups and downs. We have found that people like a real asset so real you can see it on Google Maps (and even touch it, if geographically feasible).

It’s a real opportunity—about as real as it gets.

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