11/18/2022 | by

Nuveen’s Global Chief Investment Officer and Head of Real Estate, Carly Tripp, sat down with REIT magazine to discuss not only some of the challenges real estate and capital markets face during tumultuous economic times, but also some of the opportunities that might arise as a result of the inevitable downturns, disruptions, and highly volatile nature of a global economy.

Given the uncertainty across markets today, does real estate still hold the same value for investors?  

Surveys of institutional investors continue to show an expectation for increased allocations to real estate, suggesting they continue to view the sector as having attractive returns prospects, particularly on a risk-adjusted basis. We agree with that notion.  

When it comes to managing volatility, do you still see real estate as a relatively stable investment?

Private real estate, equities, and public REITs all deserve a place in an investor’s portfolio. Each accomplishes something different. Real estate has delivered returns above inflation more consistently and had fewer or less severe drawdowns, which allows your capital to compound at a greater rate.

While there are near-term macro headwinds, these headwinds, like central bank tightening, higher rates, inflation, and geopolitical risk aren’t unique to real estate, and the strong fundamentals of certain sectors like industrial and housing could help real estate weather the storm.

What sectors will prove to be worthwhile investments in highly inflationary times? 

We’d note that real estate generally offers an inflation hedge when markets are tight and landlords accordingly have pricing power. One benefit of the last few years was that supply chain issues helped keep a lid on new construction. As a result, globally, fundamentals are pretty strong.

This is particularly evident in residential and industrial markets, where greater than 75% of markets across the United States, Asia Pacific, and Europe all have vacancies today below their long-term average. In the U.S., all of the 50 largest industrial markets have vacancies today below their long-term average. For apartments, it’s 43 of the top 50 markets with vacancies below equilibrium. Retail has lower vacancies today in 42 of 50 markets, with particular strength in neighborhood retail.   

Which trends brought on by the pandemic are now starting to fade and where do you see growth opportunities going forward? 

Working from home obviously reached a peak during the pandemic, but we are continuing to see an increasing number of employees returning to the office. While we don’t expect to get back to pre-pandemic levels of in-person office attendance, it is noteworthy that we are seeing some office markets with leasing activity above pre-pandemic norms, mainly in the Sunbelt and in biotech markets like Boston.

The retail sector had a particularly strong run during the pandemic, with more store openings than store closings for the first time since 2016. Most malls continue to struggle, as have urban retailers in central business districts reliant on office tenants, but local retail such as community and strip centers have record low vacancy rates with little supply underway.

In a downturn, all retail gets hurt, but these centers have somewhat proven their resiliency over the course of the pandemic. The pandemic also further unlocked migration within the country, which we believe continues to provide an additional boost to lower cost-of-living markets, although true “Zoom towns” are starting to see some weakness as folks get called back to the office.  

Do you think the housing market is now correcting?  

Carly Tripp
Carly Tripp is global chief investment officer and head of investments for Nuveen Real Estate, a leading investment manager with $156 billion in assets under management. Globally, Tripp leads a team of 300-plus investment professionals.

The most concerning headwind to near-term home price appreciation is the rapid decline in affordability due to higher mortgage rates and resilient home prices. With that said, existing homeowners, perhaps not prospective first-time home buyers, should have reasons to be optimistic that any near-term adjustment in home prices may be more modest and slow-moving than past pockets of housing weakness—with some regional differences aside.  

What correlation are you seeing between public and private real estate? 

Public real estate is a useful leading indicator for private real estate, with a fairly strong correlation to private real estate price movements on a two-quarter lag. However, corresponding price changes in private real estate are typically a fraction of the public markets.

Private values adjust more slowly, but as a result they don’t overshoot so far in each direction.

Although it is now a talking point that REIT values have fallen during 2022 while private real estate values have continued to climb, we’d note that public REITs are still up 31% relative to the first quarter of 2020 while private real estate values are up just 27% over the same time period.  

In your latest market report, you espouse the virtues of the self-storage sector. Why?

Self-storage sector has among the lowest capital expenditures as a percent of net operating income, resulting in higher total returns. There is also built-in inflation protection as shorter rental durations and monthly leases allow for frequent rate changes, providing a hedge against inflation. 

The sector’s demand drivers such as life events, moving, and downsizing are uncorrelated to the broader economy and perform well across economic cycles. Overall, sector usage continues to increase with millennials as the largest tenant cohort and COVID-19 leading remote workers to convert part of their homes into offices, thereby creating the need for self-storage.

Looking outside the U.S., where do you see investment potential?

While we think the U.S. economy is particularly resilient, there are many global opportunities we like. For example, European suburban housing, namely apartments and single-family rentals, where the industry is still in the early stages of institutionalization. There is an increasing preference to rent across the region, while favorable demographics are apparent in the Netherlands and the Nordic countries.

European data centers are also interesting. Data storage requirements are growing at an exponential rate and demand for space is at all-time highs. Secondary markets, meanwhile, are seeing less construction.

Senior living facilities in Tokyo, meanwhile, offer a fragmented market with demographic tailwinds.

What types of PropTech will have the greatest impact on real estate?

PropTech continues to represent significant opportunities for real estate in the short and long term. We saw record levels of new startups, venture capital funding, and M&A activity in 2021 and early 2022, and although the choppy macro environment has slowed many of those indicators during the second half of this year, PropTech remains on the shortlist of strategic priorities as we head into 2023.

The PropTech market is broad and includes technologies in various stages of maturity, so there are many opportunities for technology to make an impact today, while continuing to be a driving force that shapes the industry’s future. 

Data and sustainability are two of the most significant PropTech trends relevant to real estate today. Software tools and data strategies that enable investors and operators to make better decisions will have significant near-term impacts for firms that embrace them. Similarly, technology will play an outsized role in real estate’s ability to decarbonize and achieve sustainability goals in the coming years.

Although net zero carbon timelines span years, often decades, PropTech is critical to benchmarking carbon footprints today. Measurement is the key first step to real estate’s decarbonization journey.

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