Evaluating the Benefits of Real Estate as an Investment

The COVID-19 pandemic created change across numerous industries, and real estate certainly was no exception. The sector faced a multitude of challenges-from rising interest rates to a national housing shortage-that were unimaginable five years ago.

Two experts in the space, Allan Swaringen, president and CEO of JLL Income Property Trust, and Mark Schlossberg, co-managing partner, Southwest Value Partners, weighed in on the state of the industry during a breakout session at MOSAIC. Tyler Glover, William Blair's director of consulting services, moderated the presentation.

Tyler Glover (TG): How has the institutional real estate market evolved amid the challenges of the past few years? Allan Swaringen (AS): When we're talking to large institutional investors, they often think about real estate as an asset-allocation decision-not as an individual investment, not as a trade, and not as a deal. Real estate also performs very differently over long periods of time than stocks and bonds. You're getting something with lower volatility. More than anything else lately, real estate has been a nice inflation hedge; it protects your investing and purchasing power because rents typically go up over time. TG: Can you discuss the approach of opportunistic investing in real estate? Mark Schlossberg (MS): Real estate is a very inefficient asset class, so we focus on buying real estate that a core investor would buy, but when it's not stabilized. It could be that it's not fully leased or not appropriately positioned because it needs renovation, among other reasons. Then, we acquire the asset, stabilize it, position it properly, and create value. TG: What are attractive sectors for real estate investment? AS: Our largest allocation is residential, both apartments and single-family homes, which is a very large and growing investment sector. We also like industrial and neighborhood and community grocery-anchored retail. Healthcare is also a growing industry, and real estate that supports healthcare is a space we want to be in for the long term.

MS: There's a trend to require people to return to the office, but to attract them, you've got to have amenities and be in enticing locations. Many office products, such as consumables or equipment, will become obsolete, but we see the higher-quality spaces doing pretty well. TG: Can you discuss the appeal of multifamily? AS: There just hasn't been enough housing being built since the 2008 financial crisis. That's a long-term tailwind for renting. Investing in that trend is a potential way to make money. One example is that we're buying garden-style multifamily housing in attractive school districts. People move there, rent a unit, and they stay there longer. TG: From an interest rate perspective, what does it take to see improved activity, and how do supply issues factor in? MS: If people bought their home before the last 12-18 months, they don't want to give up their interest rate. If someone's got a 3% mortgage, and they would get a 6% right now, it would cost them twice as much. But if wages get to the same level as inflation, you find a temporary new sense of normalcy, and, at some point, you must reach equilibrium for prices because people need homes.

With ever-evolving updates surrounding the real estate industry, William Blair will continue monitoring the potential opportunities that pair with using real estate as an asset class. For specific questions, please work with your William Blair wealth advisor to create a plan that best fits your financial goals.

Disclaimer

This summary reflects approved excerpts taken from the presenter's live session, and is not to be redistributed under any circumstance. This commentary is for informational and educational purposes only and not intended as investment advice. Views and opinions expressed are those of the presenter(s) as of October 2024, are subject to change without notice, and do not necessarily represent the views and opinions of William Blair and Company, L.L.C.