FA Magazine July/August 2021 - Page 58

REAL ESTATE
of a sale if they identify another similar property to buy within 45 days and make the purchase within 180 days .)
The sales of existing homes are being prompted by persistently low interest rates and the fact that there are almost never enough new homes built to meet demand . Between 1.6 million and 1.7 million new homes are built each year even though approximately 2.1 million are needed , says David Copp , portfolio manager for the TIAA-CREF Real Estate Securities Fund . Last year , there were 6.5 million homes sold in the United States , and that number is projected to increase to 7.1 million this year , according to Statista , a research and statistical firm covering real estate .
Multi-Family Sees Strong Demand
Multi-family properties are also seeing strong demand . “ We continue to see solid rent growth ,” Dhanda says , “ especially in the suburban markets , as people are finding it easier to relocate as their primary office location may no longer dictate their living situation .”
Reynolds adds : “ For those investors who own portfolios of single-family homes , even if it is only five or 10 properties , they may want to consider looking to buyers outside their local market . Depending on the market in which the properties are located , institutional buyers are incredibly active in the space right now and may provide a more efficient sale and potentially better pricing .”
Even though there has already been some slippage in the last few months , residential real estate demand is still up markedly from the beginning of the pandemic . Sales of single-family homes , town houses , condominiums and co-ops dropped 2.7 % from March to April this year , but were up nearly 40 % in April from April 2020 , according to the National Association of Realtors .
“ Despite the decline , housing demand is still strong compared to one year ago ,” said Lawrence Yun , chief economist at the National Association of Realtors , in a monthly association report on existing home sales . “ The additional supply projected for the market should cool down the fast pace of price appreciation later this year .”
Investors in commercial real estate should be aware that within this broad category the recovery is going to be uneven between different sectors , Schnure says . “ Some sectors are going to be subject to recovery lags ,” which is not unusual . “ For example , following the dot-com bust in 2001 , real GDP began rising again in 2002 . However , the office market continued to weaken into 2004 .”
Business tenants do not want to commit to new leases until they are sure the space will be needed , and workfrom-home options are complicating the process this time . “ We should not be surprised the commercial real estate markets are not having the same vigorous comeback that other real estate sectors are experiencing . It will happen in a year or so ,” he adds .
Online sales have given a boost to industrial real estate because companies need more warehouse space to fulfill orders in a timely manner . Industry sources estimate that e-commerce demand requires up to three times more industrial warehouse space than traditional brick-and-mortar sales to fulfill orders , Dhanda says .
“ Industrial real estate is thriving like never before ,” Dhanda says . “ Markets with strong links to national and regional supply chains , such as Los Angeles , New Jersey and South Florida , are seeing strong demand growth .”
Hospitality Remains Soft
Hospitality sectors are also going to continue to see only a slow improvement for a time , Schnure says . However , investors in any real estate property that involves digital services have done very well .
“ Sectors that support the digital economy have enjoyed booming demand over the past year as social distancing requirements prompted many types of economic activity to shift from in-person interactions into the digital realm ,” Schnure says . “ These markets include industrial prop- erties , dominated by the logistic facilities that are critical for the fulfillment of goods bought on the internet , and data centers , which house the servers that host websites and route data communications from their source to final destination .”
He adds , “ These digital real estate sectors had strong stock market total returns during the period from the market bottom in late March of last year until the announcement of a successful vaccine last November , and [ digital sectors had ] more modest returns over the past six months .” Returns have ranged up to 18.2 % since the pandemic began .
Malls and other retail stores are going to take until 2022 to fully recover , especially in light of the pressures retail was already facing before the pandemic , Schnure says .
Brendan Lee , portfolio manager of the TIAA-CREF Real Estate Securities Fund , was a little more optimistic about retail real estate and less hopeful for office space .
“ Malls are up 21 %, and people can expect the retail space to normalize back to pre-pandemic levels in coming months . In-person shopping was hurting going into the pandemic , but there is going to be a pent-up demand for the experience for at least six months ,” Lee says . “ There is some optimism in the market for malls and lodging . However , traditional office space may be slower to come back . That is going to be a battle , because the jury is still out on how many people will come back to the office .”
Although most advisors use REITs in their clients ’ portfolios , Nareit feels some do not use them enough , and the association has created a website ( REIT . com / quickfacts /) to help advisors inform their clients about the advantages of these vehicles , says Abby McCarthy , Nareit ’ s senior vice president of investment affairs .
“ REITs are the third largest asset class after equities and bonds , making up 14 % of the market ,” McCarthy says . A wellbalanced portfolio can include 5 % to 15 % of investments in commercial real estate , with the percentage declining as the person ages and switches to a larger percentage of fixed income , she says .
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