Thank you for your message. We will contact you shortly.
A home for real estate in multi-asset portfolios
Bottom line up top:
- The Fed commits to higher for longer. The policy implications of last week’s U.S. Federal Reserve meeting injected a fresh dose of volatility into markets. Equity markets in particular took a tumble, with the S&P 500 Index falling 2.9% for the week. Fed Chair Jerome Powell’s hawkish messaging overshadowed the widely anticipated decision to keep rates steady. Likewise, the Fed’s “dot plot” of expected future rate levels implied one additional increase in 2023, after which rates will likely remain at their higher-for-longer plateau. These projections also included fewer rate cuts in 2024 compared to the Fed’s previous dot plot in June — a shift that sent the Fed-sensitive 2-year U.S. Treasury yield to its highest closing level since 2006.
- Seeking shelter from the hawks. With the Fed dominating headlines, several housing-related data releases fell under the markets’ radar. Together they signaled a notable cooling-off of the U.S. housing market: New home construction fell over 11% in August (Figure 1), reaching its lowest level since June 2020, driven in large part by a 26% drop in multi-unit housing starts. At the same time, apartment rent increases decelerated, with Zillow’s year-over-year rent index showing just 3.25% growth, down from nearly 8% at the start of 2023. With demand waning and real-time rent growth moderating, we expect further decreases in owners’ equivalent rents, a component of the Consumer Price Index that currently accounts for 65% of the CPI’s year-over-year increase and is reported on an approximately 12-month lag. If these expectations come to pass, we may see a definitive end to the Fed’s current rate-hiking cycle — which could prove extremely beneficial for commercial real estate investments.
[Like what you’re reading? Sign up here for Nuveen’s weekly CIO commentary to receive content like this delivered to your inbox every Monday.]
Last week’s comments from the Fed seem to confirm that rate cuts are not coming any time soon.
In our view, an allocation to real estate remains essential in a multi-asset portfolio. But choosing between public and private real estate exposure comes down to the specific role the allocation is intended to play. Publicly traded real estate investment trusts (REITs) have historically outperformed when equity markets are rallying, but also tend to exhibit higher relative volatility compared to the S&P 500 Index. Additionally, a REIT’s share price may trade at significant premiums or discount to its net asset value (NAV). For example, publicly listed REITs currently trade at a -13% discount to NAV, versus their long-term average discount of -1% (Figure 2). Moreover, while REITs have historically lagged broader equity markets during central bank rate-hiking cycles, they have also shown relative outperformance as visibility to the end of the cycles improved (as was the case in 2006 and 2018). Such periods typically coincide with a broader economic slowdown when REITs’ longer-duration cash flows find more favor in the market.
Private real estate offers the potential for attractive yields while offering diversification and uncorrelated returns during times of market turmoil, such as we saw during the Covid-induced recession and equity bear market. In contrast to public real estate, which is traded on stock exchanges where prices fluctuate daily, private real estate values are determined solely by observed, actual real estate transactions. As a result, private real estate typically experiences less volatility than its public counterpart, and tends to be less correlated to public equities.
We’re currently finding attractive investment opportunities in both public and private commercial real estate. The gaming sector, a relatively new public REITs category, offers above-average cash flows and dividend growth. Since 2019, this sector has generated high-single-digit rental and dividend growth, reflecting annual rent escalations on most leases. Consolidation within the gaming industry has also been a tailwind, with external growth driven by sale leaseback agreements with operators. The sector has also benefited from limited new supply given regulatory restrictions on the number of casino licenses and the significant capital requirements to build.
We’re also constructive on the industrial real estate sector in both public and private real estate. The sector is still being buoyed by e-commerce tailwinds, which should support urban logistics locations in growing metro areas of the South and West Coast. Additionally, supply chain diversification and nearshoring trends should boost demand for space at East Coast ports and U.S./Mexico border markets.
The industrial sector appears to be bright spots in both public and private real estate.
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
All market and economic data from Bloomberg, FactSet and Morningstar.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.
Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
Nuveen, LLC provides investment services through its investment specialists.