For Morgan Stanley’s Laurel Durkay, investing in real estate is, at its core, problem solving. In her new position as head of global listed real assets, Durkay faces no shortage of challenging variables to assess as she and her team plan global investment strategies.
Durkay recently spoke to REIT magazine on the firm’s global focus, sustainable investing, the outlook for urban areas and REIT sectors, and more.
You joined Morgan Stanley in late 2020. What are some of your key priorities in your new role?
As portfolio manager for both U.S. and global real estate securities, I will be responsible for the entire universe of global real estate for the firm. I will also be helping to lead the research process here too, working very closely with the analysts and other portfolio managers around the world to uncover the best value opportunities available for our investors.
What performance trends are you seeing across global markets?
From a macro perspective, we are seeing an uneven recovery in 2020 across the major regions around the world. Asia is going to continue to experience a recovery from the pandemic sooner than the other areas, only because they implemented much stricter containment of the virus early on. And a rebound has already occurred in China.
When you think of the underlying dynamics that will influence the overall real estate market, I do believe that you’re going to see strength from a fundamental perspective led by China, Hong Kong, and to a lesser extent, Singapore. Japan and Australia will be less influenced by the China macro environment but should also continue to experience the recovery and rebound in real estate fundamentals with the recovery from the COVID-19 pandemic.
When we think about the U.K. and the broader Eurozone, it’s a bit of a different picture there as we are seeing multiple waves of the pandemic. That is really negatively influencing both the broader macro picture and economic growth, as well as the real estate fundamentals in Europe. However, the successful dissemination of vaccines should have a positive influence on the UK and Euro zone economies.
What is the focus of Morgan Stanley’s global real estate strategies, and what opportunities do you see there?
The focus is underwriting real estate fundamentals in the individual markets and micro markets that we’re invested in. When looking at real estate fundamentals, of course, we need to consider the impact of COVID-19. When you take a step back and think about the operating fundamentals within listed real estate, the impact has been draconian.
That said, I believe we will see a recovery in 2021 into 2022. That is really the primary focus of the team across the world right now. We are interpreting both the secular and more cyclical impact of the pandemic within different sectors and asset classes and appropriately underwriting and assessing the relative valuation.
Which REIT sectors are you currently focusing on?
Essentially, we’ve seen a disproportionately negative impact on almost all real estate regardless of sector. So, if you were to look over the course of 2020, the total global index was down 8% to 9%, whereas the broader equity indices were up closer to 15% to 20%. A lot of that stems from the fact that we’ve seen real estate negatively impacted by the closing down of the economy and through the social distancing and quarantining measures that were put in place.
So, when you look at the hotel, hospitality, and leisure industries for example, obviously that sector was heavily impacted by travel restrictions across the globe. Looking at the office sector, again, we see demand has been negatively impacted because almost overnight, we have many individuals working from home for a significant portion of the year.
In almost every major developed market that we are invested in we saw the closure of retail and entertainment facilities. This in turn negatively impacted rent collections.
Shift to senior housing, and again we see another sector that was very severely impacted wherein the absolute number one priority of landlords was to try to ensure the health and safety of their residents first.
Fast forward to now and we are trying to understand which of these businesses have experienced a cyclical impairment. That is, sectors that should be able to rebound to pre-COVID levels in the short-term and where COVID hasn’t permanently changed the way the underlying real estate is being used. Conversely, distribution, logistics, data centers, industrial warehouses, and cell towers have all benefitted from increased demand during the pandemic.
What drew you to managing REIT portfolios as a career to begin with?
It’s understanding the fundamental dynamics, the drivers of demand within these physical assets across the globe, that’s so interesting. There is an art and a science to really understanding what the fundamentals are and then sort of mixing them both up, that draws me to real estate and continues to excite me when thinking about all these variables. That’s what I find most rewarding.
What do you think are the strengths of you and your team?
As we’ve seen with COVID, we are living in unprecedented times so our ability to estimate where demand is going to go from here is a challenge. We’ve never experienced a global pandemic of this nature and simultaneously had the technology in place that we do today. Now we can rapidly understand and interpret the changes within real estate that we’re seeing right now.
It’s the confluence of many different factors that’s creating a big opportunity set as we stand today as a firm. In times like these, it really calls for a creative approach to understanding how demand and real estate can evolve and it’s our creative approach to problem solving that differentiates us.
I hope that what I personally bring to the table as I evolve here is being able to look at these property portfolios as not just real estate, but also as equity securities.
How has COVID impacted future business planning for you and your group?
I have not met most of my team in person yet, unfortunately. I say this from the lens that I don’t believe any of us will be working from the office 100% of the time anytime soon. I think we’re adapting to more of a hybrid work environment, which will ultimately be most efficient and productive for my team and my business going forward.
What does the future hold for large urban areas and sectors like office and retail?
We need to really understand the underlying dynamics that are unfolding within major cities. There is always the potential for a great deal to be found, but there are a few things that we need to look at for offices, like what’s the industry mix look like that we’re investing in and what do we believe the propensity to work from home versus working at the office will be on a go-forward basis.
For example, some cities might have a larger percentage of healthcare workers in physical offices. Similarly, there are a lot of government workers who are required to be in their office buildings. Let’s look at a city like Tokyo, where the average square footage of a residential unit for a family of four is maybe 600 square feet. Now take Washington, D.C., where the average residential unit for a family of four can be up to quadruple that amount. Naturally, the propensity for workers in Washington to continue working from home is probably higher than it would be for that same individual in Tokyo.
Despite COVID’s severe effect on shopping centers and malls short term, I believe there will be a strong need for physical stores going forward. And instead of being a pure e-commerce environment, we’re going to be operating within the omni channel distribution model.
Morgan Stanley is heavily focused on sustainable investing and ESG initiatives. What are some key things you want to see companies doing?
There is significant focus on ESG across the board in our industry. Not just from the issuer’s perspective, but also from asset managers and investors. We need to continue to put policies and procedures in place that benefit the social wellbeing of clients, employees, and tenants.
I’m very happy to say that there were a lot of participants on the healthcare, apartment, and industrial side who created funds specifically dedicated to helping their employees, tenants and clients during COVID by either securing PPE for their tenants to make sure that their health and safety was an absolute priority or providing rent relief to tenants that could prove COVID hardships. And this was something voluntary, not mandated.
I think the more focused social impact a company can have, which could lead to potentially sacrificing short term financial gain for a longer-term social benefit, is what companies need to be aiming for. We also need continued transparency on ESG reporting and awareness of what companies are doing on the environmental front. For example, what are their carbon footprints and emissions, or what waste management policies have they put in place? We need to focus on health and wellness, not just for employees, but for tenants, and the actual health and safety of the physical buildings too.