07/26/2023 | by Clay Risher

Jon Cheigh is executive vice president, chief investment officer, and head of real estate at Cohen & Steers, and also serves as senior portfolio manager for all global real estate strategies. He recently spoke with REIT.com about trends in public and private real estate investment, the current state of capital markets, and how diversifying allocations in certain sectors and geographies can mitigate risk.

Cohen & Steers was one of the first investment companies to specialize in listed real estate. How has this investment focus evolved over time?

Our firm’s experience and focus on listed real assets dates back to 1985, a year before our inception, when Marty Cohen and Bob Steers created the first mutual fund specializing in real estate securities at a predecessor firm. They established Cohen & Steers in 1986 as one of the first investment managers dedicated to listed real estate, and we still have one of the largest global investment teams with more than 20 professionals across the globe dedicated to this asset class.

Since then, we’ve expanded our investment strategies to include additional core real assets, preferred securities, and most recently, private real estate. We see this all as an extension of our focus on listed real estate, which has never wavered, nor has our investment leadership in the space or our performance consistency. We believe that all of our investment areas build on each other, which allows us to be an even better investor across all of these asset classes.

The listed real estate market has grown and evolved considerably. As the economy has changed, the use cases of real estate have changed and thus the incredibly wide range of “what is a REIT” has evolved greatly over the last 30 years. REITs have been on the leading edge of making real estate transparent and better understood.

Given the current state of the capital markets, where are things headed for listed real estate?

Jon Cheigh, executive vice president, chief investment officer, and head of real estate at Cohen & Steers
Jon Cheigh of Cohen & Steers

REITs had a tough 2022, but the macro challenges explain a lot of the underperformance. Slowing growth and higher interest rates to combat record inflation created a stagflationary backdrop that creates challenges for all asset classes including real estate, rather than just a pure inflationary period, which usually presents tailwinds to REITs.

However, listed REITs produced positive returns the past two quarters ended March 31, while private real estate, which experienced positive performance in 2022, has been down over the same period. This is consistent with the long-term relationship between listed and private real estate, given the lead/lag dynamic between the two. We expect reported private market values to continue to decline over the rest of this year.

As a result, we believe attractive entry points have emerged for investors as REITs are already discounted, and they have historically performed well in the environments we are anticipating in succession: the end of the rate-hiking cycle and transition over time to early-stage recovery.

Based on research from 1990 until December 2021, the best returns for REITs have been generated by investing during the early part of the cycle, with average 12-month forward total returns reaching 20.4%. However, investing during a recession has generated forward returns on average of 10.8%, which is above the long-term results.

We believe attractive entry points have emerged for investors as REITs are already discounted, and they have historically performed well in the environments we are anticipating in succession: the end of the rate-hiking cycle and transition over time to early-stage recovery.

Jon Cheigh, executive vice president, chief investment officer, and head of real estate at Cohen & Steers

Why did Cohen & Steers decide to launch its private real estate business in 2021?

We saw the opportunity to launch our private real estate group as a strategic extension of our real estate expertise. Expanding into this market allows us to offer individual and institutional investors a broader range of real estate strategies and customized solutions. In many discussions with our clients, we have observed a growing interest in allocating nimbly between private and listed real estate, in response to changing market conditions.

Also, we believe that investors should have strategic allocations to both private and listed real estate; it’s never been an either-or proposition. Our analysis shows that a portfolio that is optimized between private and listed can deliver stronger returns while reducing volatility. Because listed and private also differ in timing and duration of performance, investors can benefit by allocating at different times across the two asset classes.

In addition to the current entry points we see for REITs, we also believe that repricing and historical performance of real estate throughout market cycles is pointing toward attractive investment opportunities in private real estate over the next six to 18 months.

Where are some of the opportunities today in both the listed and private markets?

In the listed market, we are overweight residential sectors, including single-family homes and Sunbelt apartments, supported by rental housing demand due to affordability challenges in the purchase market and demographic tailwinds. We also see value in senior housing, where occupancies fell dramatically in early 2020 but are now steadily recovering. We believe that data center REITs are well situated due to increasing investment in cloud computing and have pricing power, given limited new supply.

Similarly, we are focused on the Sunbelt region when it comes to opportunities in the private market, as companies and individuals continue to migrate to there. As such, we think there are strong opportunities in the private residential sector, given the affordability challenges previously mentioned, and in shopping centers. The U.S. consumer is in relatively good stead, particularly versus 10-15 years ago, combined with very little new supply over that same time period.

We also believe that Sunbelt offices are attractive, given company relocations and occupancy trends in the region. However, investors should be selective in investing in higher quality assets and in submarkets which we feel are in the path of future economic growth.

What advice would you give to real estate investors as they think about managing short-term challenges and long-term goals?

We work with many highly sophisticated investors across the globe. Based on observing some of the most successful over long periods of time, we would offer the following advice to all investors whether large or small. First, spend the time and set a strategic asset allocation and stick with it. The last thing you want to be doing is talking yourself in circles or following today’s newest trend.

Second, pick high quality managers based on their long-term results, their investment culture, and their record of developing people. Third, always think long term and systematically re-balance in and out of asset classes with reasonable discipline. Last, take advice but don’t follow the crowds and appreciate that often there are reversions to the mean when valuation and sentiment gets to extremes.

We focus a lot of our time on educating our clients about markets and cycles moving up and down over time. It has been that way in the past and market cycles will continue in the future. Those cycles, and even the inherent volatility, are what have and will continue to create market opportunity.

What advice would you give to REIT management teams and boards?

Over the last 20-plus years, REIT management teams have done an exemplary job becoming more focused, increasing transparency, and demonstrating discipline. That being said, even though all of that is to be celebrated, we want REIT management teams to know that we also want them to be entrepreneurial, visionary, and long term oriented—those are the original positive attributes of how the REIT industry was born.

We believe listed markets have produced great returns over the long run because transparency is a positive. But we don’t want the pendulum and feelings of scrutiny to swing too far to corporate short-termism. Management and boards should operate their businesses to maximize long term value. Transparency, focus, and a long-term orientation can and must coexist in the listed REIT market in order to continue the industry’s success.

Where do you see the public and private REIT markets in five to 10 years?

We believe investors continue to be under-allocated to real assets overall, however, the shift from a regime of low rates and low inflation to one of slower growth, elevated inflationary risks, and continued volatility will provide opportunities for investors to increase their allocations, helping to close the adoption gap for alternatives.

In the expected higher inflation, lower growth environment, we believe that REIT cash flows will remain resilient and that constrained new supply will benefit real estate prices, though lower economic growth could be a modest headwind.

While listed and private real estate returns tend to be similar over long periods, private real estate typically lags listed real estate due to its slower moving price discovery and transactions. With listed already rebounding from its 2022 lows, we expect private real estate to trail listed markets.

All that said, one of our goals is to educate investors on how to be more strategic and tactical in how they allocate to both listed and private real estate. We hope that over the next five to 10 years, this mindset will become more commonplace.