Real Estate in Recovery Mode Plus

Portfolio Manager JR Humphreys ends every presentation with a reminder that real estate is an asset class that “has everything to offer,” including the potential for both rising dividend yields and capital appreciation. Inflation? Real estate investments serve as a hedge, Humphreys explains—as the cost to replace structures rises, the value of existing buildings goes up. Portfolio Manager JR Humphreys ends every presentation with a reminder that real estate is an asset class that “has everything to offer,” including the potential for both rising dividend yields and capital appreciation. Inflation? Real estate investments serve as a hedge, Humphreys explains—as the cost to replace structures rises, the value of existing buildings goes up.

“The current recession was caused by dramatic changes in consumer behavior linked to business shutdowns, travel restrictions, and social distancing during the pandemic,” Nareit.com comments.“Economic activity and job growth have begun to recover as parts of the economy reopen, but remain well below pre-pandemic levels.”

Actually, the post-pandemic upwards direction in the price of most categories of REITs (real estate investment trusts) is not all driven by the general economic recovery, JR Humphreys posits, but rather by two primary factors:

1. investor concerns about inflation
2. the potential for rising interest rates

Since by law, REITS are obligated to pass 90% of earnings along to shareholders, they are particularly attractive to investors seeking current income along with growth potential, Humphreys adds. Different categories of real estate investment have been affected by the general economic recovery in different ways:

• Apartment buildings
  Strong migration away from both east and west coast cities and into “sunbelt” areas (Nashville, Charlotte, Arizona and Florida locations) with cheaper labor and more favorable governance has led to a wave of new apartment construction.
• Retail centers
  Shopping malls have begun to rebound at a fast clip.
• Office buildings
  Rents are beginning to stabilize as workers begin a slow return to the office.
• Medical buildings
  Long term leases, many containing “escalator clauses” keyed to inflation, have continued to raise the value of existing facilities.
• Cell towers 
  Expanding 5G technology continues to generate a demand for real estate space.
• Server farms
  The ever-increasing need for cloud storage of data (for both personal and business use continues to enhance the value of “server farms,” whose landlords provide cooling for the vast banks of computer data processing systems.
• Warehouses
  This segment of the real estate market has been maintaining value, still lagging behind the momentum of other segments.
• Travel and entertainment venues
  These areas of the economy are just beginning to show evidence of a recovery.

As is true in other areas of investment, diversification is key when investing in real estate, JR Humphreys reminds readers. Nareit.com offers additional encouragement: “The pandemic recession, in contrast, was caused by an external shock to an otherwise healthy economy…many of the underlying fundamentals of the U.S. economy remain sound, and may be able to recover more quickly once the pandemic is brought under control.”