Are we there yet? The state of the recovery in real estate
Values of nearly all real estate sectors declined at the onset of the coronavirus pandemic, but the initial fall was short-lived. Many sectors recovered quickly, and are exceeding their pre-pandemic valuation levels.
At this stage of the recovery, we see areas of opportunity and a progression toward normalcy. However, asset selection is key, and that dynamic favors experienced active managers with local expertise.
The pandemic targeted certain sectors
The current trajectory is different from the Global Financial Crisis, when all sectors suffered significant valuation declines and took years to recover. As we see it, the main difference between the two crises is the cause of the downturns. The Global Financial Crisis resulted from a capital crisis that expanded into an operational crisis. In contrast, the coronavirus pandemic caused an operational crisis that, thanks to deft fiscal and monetary policies, avoided turning into a comprehensive capital crisis.
This distinction is important. A widespread capital crisis, characterized by a lack of financial confidence and liquidity, negatively impacts all asset classes and entails many years of recovery. Conversely, an operational crisis targets only certain sectors. That is certainly the case in the current recovery. Sectors like health care, industrial and housing were fast to bounce back. Other sectors more directly hit by the economic shut-downs, like retail and office, have been slower to recover.
What lies ahead?
This dynamic helps explain the near-term prospects for real estate. The sectors that were operationally successful during the trough of the pandemic are highly sought after by investors and have already exceeded pre-pandemic valuations. We expect this momentum to continue.
However, investors remain skeptical about sectors where full utilization has not yet returned, such as traditional office buildings and shopping malls. Valuations remain challenged in these sectors.
Widespread vaccinations are critical for these stressed sectors and, fortunately, distribution is well underway. Employers are expected to begin encouraging employees to return to offices full-time and retail properties are lifting restrictions on density, mask-wearing and operating hours.
Despite a gradual return to normalcy, investments in these sectors will still require in-depth analysis, as structural headwinds prior to the pandemic have not yet receded. For example, office assets that do not feature the latest appealing amenities, healthy and comfortable layouts and environmentally friendly features were challenged before the pandemic and will be even more so when employees return to the office. Similarly, retail assets lacking needs-based, luxury or experiential offerings will face potential challenges when shoppers resume traditional spending patterns.
Savings offer reasons for optimism
Consumers spent the year of the pandemic staying home and saving money. Expenditures on commuting costs, leisure activities and annual holidays plummeted in 2020, and many consumers received relief payments from record fiscal stimulus packages. As a result, savings ratios more than doubled in some countries.
Real estate provides income opportunities
Investing in the current real estate environment provides an exciting opportunity to benefit from the momentum of the operationally successful sectors and leverage the short-term undervaluation of challenged sectors. At the same time, commercial real estate continues to provide investors with potentially tax-efficient, stable annual cash flows that are attractive, particularly relative to bonds.
In this issue
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 is no guarantee of 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.
A word on risk
Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.
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