The Ideal Post-Pandemic Portfolio

The current spread between direct real estate cap rates and corporate bond yields is well above the historical average.

While certain real estate segments, like lodging and retail, have struggled during the pandemic, the current spread between direct real estate cap rates and corporate bond yields is well above the historical average.

Melissa Reagen, head of Research at Nuveen, writes for Preqin that this signals real estate’s strong relative value. And as the pandemic plays out, she thinks that there will be opportunities to buy real estate assets at attractive prices.

“Agility and insight into tomorrow’s world are the two qualities I believe are most critical for managers and investors today,” she writes.

Right now, most institutional investors have less than 15% exposure to the alternative property types, according to NFI-ODCE. But Reagen expects that percentage to approach 50% in the next decade. Specifically, she expects investors to look at sectors like medical office, senior housing development, self-storage, data centers, life sciences and single-family rentals because their fundamental drivers are less tied to uncertain economic factors.

In 2020, multifamily and industrial have been the most popular investment targets claiming half of all US transactions. Still, Reagen thinks that increased competition for the best assets may mute overall performance in the medium term.

Multifamily collections remain strong, and Reagen believes it is poised for the most outsized growth in history. On the industrial side, she thinks that e-commerce retail sales will reach 20% to 25% of total retail sales in the medium term, which will increase demand for warehouse space.

The challenges are more significant on the office and retail sides, which were facing issues before the pandemic hit. Reagen thinks success in the future could be determined on the asset level with property management, technology and competitive insights providing an edge. In office, success could be adopting flexible space, while repositioning assets may be a lifeline in retail.

Ultimately, Reagen thinks an ideal portfolio would be defensive with long-term leases and high occupancy rates. Also, it would have low leverage to cushion volatility and downside risk. Eliminating risk means avoiding challenging sectors. Over time, portfolios will need to shift to balance retail and office exposure and avoid or limit exposure to hospitality, gaming or leisure.


Source: The Ideal Post-Pandemic Portfolio