Economy, Stimulus, Resiliency: Where to Find Opportunities Post Coronavirus
October 18, 2021 | James Sprow | Blue Vault
Dr. Randy Anderson of Griffin Capital presented a Webinar for Blue Vault on October 14 in which he examined commercial real estate sectors and discussed their relative attractiveness for investment in the years ahead.
Randy began with a discussion of how economic growth and real estate returns correlate. When you get a strong economy you generally get job growth and with job growth you get increased demand for space. Basically, when the economy is strong, real estate returns are strong.
Not only have returns been good, but they seem to have accelerated into the 3rd quarter of 2021 and that bodes well for the 4th quarter and for 2022. Griffin feels that real estate has some room to run.
When you look at how real estate has performed relative to the S&P 500 it looks like real estate has some room to grow.
Prior to the pandemic, we were in the late cycle of the economic expansion. Most real estate strategies were getting defensive typical for late cycle approaches. The strategic positions in late 2019 helped with performance during the pandemic.
Is Griffin expecting the strong GDP growth in 2022? “No, we think it will slow down a little bit. Some of the things that created that strong job growth will start to fade a little bit. We do see a number that is above trend, but some real estate sectors will be more challenged than others as we move forward.”
Anderson said that there is pretty broad-based inflation that we’re going to see for a while. There are certainly some geopolitical risks out there, and the most important risk is with the COVID pandemic and the potential variants.
How Will Real Estate Perform in an Inflationary Environment
As long as real estate markets have a pretty good balance in supply and demand and there is the ability to pass along rent increases, it turns out to be a very good hedge against inflation. When you see costs of construction going up and supply cannot keep up with demand, it becomes a landlord market. If you have a lease structure that allows you to take advantage of it. In general, we have a very favorable environment where GDP growth is creating very strong demand and inflation is keeping supply in check.
Due to logistics breakdowns, a lot of projects have been affecting supply. History actually shows that in a high growth environment with high inflation real estate outperforms other investments. The only environment that is not favorable to real estate is the low growth/low inflation scenario.
Dr. Anderson points out that 2021 has been typified by the High Growth/High Inflation environment. In 2022 we will be more likely to move toward the more moderate growth, inflationary environment, which is a great environment for real estate.
What Are Griffin’s High Conviction Investment Picks?
The fears that rent collections would suffer has not really materialized. Nationwide we have seen over 8% rent growth. This is going to do something really special in terms of returns. As the economy picks back up and home values have sky rocketed, multifamily markets are improving. The Q3 2021 vacancy number is at 2.9%, the lowest level since 1994 and that is broad-based across markets. Griffin believes that multifamily should be a strong sector, with the ability to increase NOI and grow rents. A lot of investors are putting capital in that space. Multifamily also has strong defensive qualities as everyone needs a roof over their head.
Single family home rentals as an asset class have also become attractive as managers have done a good job of learning how to manage those portfolios.
Another sector that is attractive to Griffin is industrial. The sector is strong. We’ve also hit an all-time low in vacancy and a high rate of absorbancy. When you look at the differences in profit margins with industrial properties compared to the profit margin in bricks-and-mortar retail industrial is very attractive. The sector is benefitting from the increased interest in just-in-case vs. just-in-time. Now inventory demand is increasing.
Another sector that Griffin is finding attractive is life sciences.
The amount of money that is being poured into the life sciences sector is going to create growth for quite some time and it should be good because there is limited supply.
Blue Vault subscribers may watch the webinar from the Past Webinars page
