Over the past few weeks, I’ve mentioned the divide between growth and value stocks, and how much of our recovery has been led by a select few companies. My recommendation has always been to rebalance your portfolio. Rebalancing brings your holdings back in line with your intended allocation by trimming positions that have grown exponentially and redirects those funds to stocks that haven’t experienced such growth. Rebalancing also aims to lessen your risk.
But what about when there is a divide within the asset itself? That’s where we are with Real Estate. You may be thinking the COVID-19 pandemic has beaten down an already suffering retail real estate market. Images of abandoned malls come to mind, and with forced closures of stores, people staying at home, and the increase in internet shopping, it’s no surprise retail real estate has taken a hit.
However, we’re also seeing some stress in commercial office space. Many companies have realized their employees are just as productive working from home. In some cases, it’s more economical to provide a phone, computer, printer, and scanner to furnish an employee’s home office rather than pay the overhead for commercial office buildings. It is likely that once the pandemic has passed, not every employee will return to the office. Some industries are experiencing increased productivity with their employees working from home. Furthermore, this trend could have trickle-down effects for surrounding businesses like stores and restaurants that relied on lunch crowds and after-work errands.
One successful area is commercial real estate for data centers. You may be surprised to know that “the cloud” isn’t actually in the clouds. The data servers have to be housed somewhere and must invest in a certain amount of redundancy. Should there be a failure on the East Coast because of a hurricane, servers on the West Coast can ensure zero downtime for those who rely on their technology. Warehouses and fulfillment centers are also seeing an uptick in their required space. With more and more products ordered online, the goods still need to be stored and shipped from warehouse locations.
Residential real estate is a mixed bag as well. Homebuilders have reported record highs in the last few months as families are moving out of overpopulated cities in favor of the suburbs. Housing starts and building permits confirm the suburban flight. Families realize they do not have to be in the city for work. Couple that with low interest rates and the desire for social distancing, and the demand for residential real estate is high. Locally we’ve seen single-family homes receive multiple offers within the first week of listing; however, the Northeast is leading the surge in residential real estate.
Investors still need to be wary when it comes to multifamily homes and apartment complexes. Many of these residents have enjoyed rent relief and a moratorium on evictions courtesy of the CARES Act. While apartment complexes are not currently showing unpaid rents on their books, the longer the pandemic continues, it is hard to tell what evictions will look like in the future.
While Real Estate can be a good option to supplement stock investments, investors need to be very selective right now in this space. The pandemic has created some shifts that may be more permanent than we believe.