The future of real estate amid rising rates  

Market volatility in 2022 hit equity and bond values hard across most regions. The increase in rates was also a massive change to the macroeconomic backdrop after the ultra-low levels since the global financial crisis. These market movements and new economic environment have significant implications for real estate investors, presenting attractive opportunities for portfolios.

Recognise the resiliency of real estate

While public markets have been turbulent, certain sectors of real estate have performed well, highlighting the resiliency of the asset class. We have seen this in industrial, housing and alternatives, including healthcare, single family rental and self-storage. These sectors and subsectors have been supported by strong fundamentals, such as leasing and rent growth, which are expected to continue and should counterbalance further volatility in capital markets.

Allocate to real estate

Many investors now find themselves overallocated to real estate as a result of the equity and bond markets losing value. However, we see investors still willing to commit to the asset class, particularly with value add and opportunistic strategies. This may be partly due to the type of investment vehicle. Unlike core strategies, which tend to be open ended, often these strategies are closed ended, allowing capital to be invested when the timing is good.

We also see investors are, in general, going for higher-return strategies. This is partly a function of the attractive returns on offer, but fund structure again is a factor. Many are favouring closed-end funds that allow the manager to invest over the next 12 to 24 months, rather than open-ended structures that are investing now.

Explore the alternative sector

Even with a dramatically different macro environment, Nuveen Real Estate is able to uncover compelling investments across a range of sectors. For example, in the U.S. single family rental segment should be in demand as mortgage payments increase with higher interest rates.

We are actively exploring healthcare among the alternative sub asset classes and finding a role for it in our portfolios. Self-storage is another example. Many of these assets offer downside risk mitigation along with historically low volatility.

We are also very positive on affordable housing. This is an under-supplied area of the market that can offer a lot of downside risk mitigation. It can also help investors who are looking for impact investment strategies.

One of our goals is to help create positive social and environmental impacts with our investments together with strong financial returns. Doing this well requires a service-oriented mindset as we need to understand what the tenants and their communities want and need. Activities can then range from pursuing energy-efficient heating, ventilation and air-conditioning to providing access to healthcare facilities. These strategies align us with our parent company TIAA and our mission and values as an organization.

Consider ESG an opportunity not a threat

While the adoption of environmental, social and governance (ESG) investing is moving at different speeds in different markets and regions around the world, the focus on the environment is only going to intensify. More and more legislators and regulators are scrutinising carbon emissions, to which the real estate industry is a significant contributor.

This exposes real estate investors to the risk of holding stranded assets as demand moves away from older, capital-intensive properties. For us, managing assets and portfolios through an ESG lens is about protecting long-term value, and it is possible that it also creates cost-savings in the short to medium term, with more energy-efficient systems, for example.

The transition to a low carbon economy needs large amounts of capital, creating opportunities for investors across most asset classes. Our research indicates that office – a sector that has struggled with demand given the flexible work practises since the pandemic – can potentially see improved returns for assets with strong environmental credentials.

Manage risks amid higher rates

While opportunities abound amid this shift to a new higher rate environment, it also presents a new set of risk for some investors. Over the last five years or so, a lot of capital has been raised with new managers, new operators and niche players. Many of these are dependent on go-forward financing, which is likely to put them under pressure with debt costs now higher and likely to remain so.

At Nuveen Real Estate, most of our larger strategies are core with very low maximum allowable leverage. We are not overleveraged and have dry powder available for when the right opportunities are identified. Those are assets that we can generate potential returns by changing, operating and repositioning. We have a sector specialist model to allow us to do this as well as 30 offices around the world that lets us add a local insight to our global perspective.