In the latest episode of our Alternative Allocations podcast, I had the opportunity to sit down with Jeb Belford, Chief Investment Officer of Clarion Partners, to discuss the challenges and opportunities within commercial real estate. Jeb and I discussed headwinds, such as rising interest rates and a challenging office sector, and where he sees opportunities in the coming years.
While the struggles of the office sector have been well documented, it is worth noting that the sector has been shrinking over the last decade, from nearly 40% in allocations to around 19% (Exhibit 1). Conversely, sectors like industrials and apartments are now the leaders within the private real estate universe, representing approximately 32% and 29%, respectively.
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Exhibit 1: Industrials and Apartments Take Lead in Sector Allocation
Jeb and I also discussed which macro themes will likely drive future performance. “We’ve identified five major themes that we think are playing out across all sorts of asset classes, including real estate, that are extremely important,” he told me. The five themes are demographics, technology, deglobalization, housing shortages and climate change (Exhibit 2). These themes impact several sectors of the real estate market.
Exhibit 2: Macro Themes Impacting the Real Estate Market
- Demographics will likely impact multiple sectors in the coming years. The Millennials and Gen Z cohorts are in their prime spending years and will need to find affordable housing. This should provide an economic boost. At the other end of the spectrum, baby boomers are retiring, and many in the United States are moving to the south and southwest part of the country.
- Technology represents another big theme, according to Jeb. “We’ve all seen the incredible pace of technological change over the last 15 or 20 years that continues [to affect] our world,” he said. Within real estate, Jeb noted, “A basic technological change that we may take for granted now is the rise of ecommerce and how that has had such a profound effect on how we shop and how we get goods and where those goods flow through real estate.”
- The third theme is deglobalization, which will lead to the movement of supply chains back to the United States. Ultimately, manufacturing and warehousing will need more facilities and more labor, leading to economic growth.
- The fourth theme is housing shortages. Jeb estimates that there is a shortage of three million to five million units in the United States. The last few decades have seen dramatic underbuilding, which impacts supply, affordability, and where and how people live (apartments and multifamily).
- The last theme is climate change. Climate change impacts real estate along the coast and across America. “If you want to have real estate that is as leasable as possible to the maximum array of tenants, you’re going to want to pay attention to the characteristics that those tenants want. One of those are healthier, greener buildings,” said Jeb.
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Please note that Clarion Partners now refers to the themes of “technology” as “innovation”, “deglobalization” as “shifting globalization”, and “climate change” as “resiliency”. Despite these name changes, the themes discussed throughout the podcast and messaging around each theme remains the same.
WHAT ARE THE RISKS?
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