Top trends in asset class performance

By Nat Kunes August 28 2020 10 min read
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If you’d asked experts last year what the most significant impacts in real estate investing might be in 2020, few would have predicted a global pandemic that swooped in like a black swan to shatter expectations and create a new normal.
In this article, we’ll examine four demographic and migration trends that we’ve seen in the last year, and how the global pandemic has impacted these trends, then we’ll follow the trends to examine their impact on asset classes to help you make better decisions about your investment portfolios.

Trend #1. Millennials Moving To The Suburbs

Millennials, born from the mid-1980’s through the 1990’s, now have established careers, started families, and are moving to the suburbs. Due to higher debt levels and lower earning power, this cohort wants a suburban home but will likely have to rent it. Not only do they want to live in the suburbs, millennials are also demanding to work there too. Pre-COVID, this trend started to force companies to think about moving from larger downtown high-rise buildings to suburban offices to serve this growing workforce.

In 2020, here’s how we may see these shifts play out:

  • We expect to see millennials continue to move into the suburbs, which provides safer social distancing versus the downtown cores and urban areas where they once congregated.
  • The opportunity here is for employers and retailers to move into the suburbs to meet the demands of this group who prefer to live, work, and shop nearby; therefore, the biggest opportunity for investors is likely retail, commercial, and office space in suburban areas.
  • Another opportunity here is in shipping, storage, and warehousing space, as retail continues to move online (away from crowded non-distanced stores) while still maintaining a local inventory. Think: local companies and local distribution, but with an online storefront.

Trend #2. Moving South

Americans are choosing to migrate to southern states, tempted by warmer climates, year-round outdoor activities for active lifestyles, affordable housing, and attractive tax policies. According to a report by the Urban Land Institute, this trend has wide-reaching implications for home-builders, retailers, and employers, who could see a reduction of demand in the north and an increase of demand in the south.

At this point, we don’t see this trend going away.

  • The challenge against this trend will be among those in northern states who own homes and can’t sell them as quickly; therefore, this trend could potentially skew to a younger (millennial) crowd, since they don’t own homes in the north and are therefore able to move more freely.
  • With rising demand, there will be an increase in house prices, but that could be offset by home-builders who have been able to continue building even through the pandemic.
  • Office space, especially in southern suburban areas (see Trend #2, above), could be an attractive asset class right now.
  • Investors should watch for economic ripples in areas where once-frozen evictions are allowed to proceed.

Trend #3. Industrial Growth

Industrial assets should remain strong and likely grow stronger in the years to come. Prior to 2020, this asset class was a burgeoning trend, fueled by the no-inventory “final mile” need for local, just-in-time warehousing and distribution centers to support the exploding e-commerce industry. E-commerce enjoyed strong growth for years but in 2020 saw explosive growth (Forbes reported that online purchases grew by 77% between May 2019 and May 2020), which fanned the flames for growth in the industrial asset class. We expect the industrial asset class to grow further.

  • A number of factors drive e-commerce growth, including the need for consumers to purchase products online and receive them in a socially-distanced way; the rise of mobile and its impact on online shopping; the rise of services like Amazon Prime that further simplify shopping; and, Millennial comfort with purchasing online.
  • Additionally, companies that no longer want to pay for large industrial buildings where social distancing is difficult, may invest in smaller, locally-focused industrial buildings closer to their workforce and customer-base.
  • Smaller, local industrial buildings also spread out manufacturing to help companies reduce the risk of a shut-down.

The Way Forward

To navigate these complex times, decision-makers will need to make fast, flexible decisions based on the individual needs of tenants, ensuring occupancy remains as high as possible while always keeping an eye on the changing landscape. Investors should monitor shifts in COVID-19 cases and consider the implications to the asset classes and locations of their investments. Be aware that trends could continue the way they are but can also be dramatically influenced by political decisions or a vaccine.

The good news is: there is always an opportunity for those who are bold and quick to act, and today’s new normal will require data-driven decisions and innovations for bold action.