KBWY - Real Estate You Need Now - And In A While

2023-10-20 06:00:00 ET

Summary

• Today’s higher interest rates and slowing growth have been elevating the need for property income stability in a real estate portfolio.
• The real estate sectors in favorable positions to sustain income stability during the current economic slowdown may not be the same sectors that deliver stronger growth when the economy strengthens.
• Structural shifts, like e-commerce and hybrid work, for example, must be considered too.

By Michael Sobolik, Managing Director, Regional Investment Strategist, North America, Invesco Real Estate

Today’s higher interest rates and slowing growth have been elevating the need for property income stability in a real estate portfolio. That’s likely to change when growth eventually improves, interest rates are lower, and the next phase of the economic cycle begins. That’s when we believe the need will shift to property income growth.

The real estate sectors in favorable positions to sustain income stability during the current economic slowdown may not be the same sectors that deliver stronger growth when the economy strengthens.

Structural shifts, like e-commerce and hybrid work, for example, must be considered too. The Invesco Real Estate team gauges sector income growth potential throughout cycles using a three-C's approach:

• Correlations of property income growth to macroeconomic drivers.
• Current sector fundamentals.
• Combining correlations and current fundamentals with long-term demand trends for a short-term and intermediate-term forward view.

The graphic below summarizes our conclusions for current and expected conditions.

Our short-term outlook

Through at least mid-2024, we expect a continuation of higher interest rates and slowing economic growth. As we noted, these conditions elevate the need for property income stability. We believe, two types of property sectors are poised to meet this need. Those with:

• Lower performance correlations to the economy, such as medical office, student housing, and senior housing.
• Growing demand and limited supply availability, such as single-family rentals and non-mall retail.

Our intermediate-term outlook

Sometime after mid-2024, we expect a transition to improved financing conditions and tenant demand when interest rates moderate. It’ll likely shift investor preferences toward property income growth.

Sectors that may meet this need consider those with moderate to high performance correlations to the economy and reduced levels of new supply in combination with either:

• High embedded revenue growth through lease expirations, such as industrial.
• Short-term leases, which allow income growth to be realized quickly, such as single-family rentals, manufactured housing, and self-storage.

It’s important for investors considering real estate to look at a portfolio’s current sector allocation. But also important is the vision for allocation for the next stage of the economic cycle and the shifts in structural utilization.

Important information

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The opinions expressed are those of Michael Sobolik which are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

Investments in real estate and real estate-related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid. Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

Correlation: a mutual relationship or connection between two or more things.

Real estate you need now - and in a while by Invesco US

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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