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Real Estate, Portfolios and Economic Volatility

By John Todd, LEX Markets LLC*

John Todd, Lex Markets

Real estate owners have just weathered a historic pandemic. Right when it looked like a return to a more normal operating environment was possible, Russia invaded Ukraine, global inflation spiked, and central banks sprang into action. Markets plunged back into a state of fear and uncertainty.

In many ways, recent events remind me of 2000-2001. At that time, the NASDAQ Composite closed over 5,000 following a meteoric rise. Dot-coms were the gamble of the day and VC’s were deploying astronomical sums into startups. When signs occurred that the market was overblown, Alan Greenspan and the Fed began raising Federal Funds rates in 2000. A few companies reported cash flow issues, and the bursting of the dot-com bubble began. Instead of clicks, “burn rate” became the measure of primary importance. A recession was declared in early 2001 and, several months later, 9/11 occured – another historical moment that would go on to change behaviors forever.

In the aftermath of those “early aughts” events, investors rushed to find safety, and real estate offered them hard assets and predictable cash flow. I had just taken a job in a real estate group at a well-known investment bank. Starting in 2001, my group seemed like the only area of the bank with deal flow. It was jarring to see the contrast of the real estate group’s activities (and the insatiable demand for real estate securities) against an otherwise dark office tower on Wall Street. We reopened the IPO markets for REITs, and investors clamored for more.

The flight to quality and stability is a natural instinct during a crisis. There are plenty of differences between then and now, yet I believe this inherent instinct will remain, meaning tremendous opportunity for real estate.

This latest crisis has created winners and losers within the asset class. Multifamily, industrial and self-storage sectors have led the recovery. People need places to live. Companies need space to operate. Students needed to store their belongings when they moved home during the pandemic, and homeowners needed to make room for home offices— a trend that will likely continue as many employees remain remote. Stability and quality will continue to lead the recovery.

We have also started to see a reversion towards the mean. Cities like New York and San Francisco, which experienced the most emigration during the pandemic, have seen a rebound in multifamily performance. Office has exhibited a year of positive net absorption, with Class A properties leading the charge. People are coming back to collaborate at the office, but it will be a gradual return.

Real estate also has a history of performing well during inflationary environments, which is comforting against the current economic backdrop. Some asset types are a better hedge against inflation than others. Multifamily, self-storage and hotels have shorter lease terms allowing owners to reset rents more frequently to higher levels.

Inflation also tends to increase the cost to develop new real estate, reducing the risk of new supply and benefitting underlying fundamentals for existing assets. Despite the broader market volatility, these characteristics are why direct investment in real estate can offer attractive risk-adjusted returns. There are still plenty of ways to make money in this economy, whether from the stability of long-term leases with credit tenants, or rent growth anticipated in a market with strong fundamentals, or potential tax benefits such as using depreciation to shelter a portion of income received from direct real estate ownership.

One significant change from 2000 to today is that regulatory changes like the Jumpstart Our Business Startups (JOBS) Act of 2021 and new technology increased  participation in direct ownership of commercial real estate. This asset class is no longer reserved for only a subset of elite investors. The passive income and value creation that direct real estate can offer during times of uncertainty is now available to the masses.

So take advantage of the market disruption, revisit your investment strategy and redeploy capital into investments that more closely align with your goals. During periods of volatility, it’s especially important to have a diversified portfolio, and opportunities to invest in direct real estate should play an important part.

*The opinions expressed and material provided are for general information only and should not be considered a solicitation for purchase or sale of any security.

John Todd is Head of Real Estate Investment Banking at LEX Markets LLC, which takes individual buildings and turns them into public stocks, available to any U.S. investor.


Inside The Story

LEX Markets LLC

About Amy Wolff Sorter

I love content. I love writing it, visualizing it, and manipulating it to fit into different formats. I have years of experience in working with content, both as creator and editor. The content I create and edit provides assistance with many goals, ranging from lead generation, to developing street cred through well-timed thought-leadership pieces. Content skills include, but aren't limited to, articles and blogs, e-mails, promotional collateral, infographics, e-books and white papers, website copy and more.

  • ◦Sale/Acquisition
  • ◦Economy