‘Have you already missed the real estate recovery?’ Investors were probably asking the same question in March 2010, after the market had doubled from its low a year before. Hopefully, those that missed the first year didn’t also miss out on the next 10 years of growth. 
We believe the current real estate recovery may be just beginning:
• Real estate demand should continue to improve as more regions lift restrictions.
• The shift from fiscal austerity to stimulus should help drive stronger growth and higher inflation.
• Slower supply growth should support occupancy rates and rent growth.
• Interest rates appear likely to remain low for the foreseeable future, with many central banks wanting inflation higher not lower.
• Valuations relative to stocks and bonds remain attractive.
• Real estate has historically delivered strong relative returns in inflationary environments.
In our view, this backdrop offers an attractive setting for investors to consider the potential long-term portfolio benefits of allocating to real estate.
The rationale is based on listed real estate’s history of strong total returns, high income resulting from the tax-advantaged REIT structure and potential diversification that may reduce overall portfolio risk, especially at a time of looming inflation.
Positioning for cyclical and secular growth potential
The current investment landscape underscores the benefits of listed REITs in offering liquidity and a wide field of opportunities for constructing real estate portfolios.
Many alternative property types – particularly data centres, cell towers and self-storage – joined the industrial sector in buoying the REIT market during the pandemic, and they remain vibrant today.
Meanwhile, sectors such as health care, hotels and apartments are benefiting from progress on both the medical and economic fronts.
Cyclical recovery
Health care: Vaccinations have led to a sharp rise in senior housing move-ins, while supply pressures have largely dissipated due to the lack of new construction over the past year. In-office doctor visits are reaching pre-pandemic levels, easing concerns over the potential effect of telehealth on medical office demand. We also see attractive defensive growth opportunities in Singapore hospitals and UK primary care medical centres.
Hotels and gaming: Resort properties and leisure destinations such as Las Vegas and Macau are experiencing the strongest demand in modern history as travellers make up for a year in quarantine. Group bookings for conventions in 2022 are exceeding expectations amid pent-up demand for in-person events. Business travel is also picking up and could accelerate in the fall. However, we expect virtual meetings to have a permanent negative impact on business transient and group demand for hotels.
Housing demand
Self-storage: For a business with monthly leases, where customers can leave at any time, self-storage has been remarkably resilient through the pandemic. In fact, fundamentals for the sector have never been stronger. Rates for new US customers are up 50–70% from 2020, exceeding their peak in 2016, and landlords have been able to push higher rates onto existing customers. Listed self-storage real estate markets in the UK and Australia continue to mature, expanding consumer usage and using digital marketing to drive record occupancies. The big question for the sector going forward is the ‘stickiness’ of pandemic-related demand. Even if move-in activity slows, we expect demand will continue to meaningfully outpace supply through at least 2022.
Apartments: Leasing trends in US coastal markets have bounced back shockingly quickly, while activity in the Sunbelt remains exceptionally strong. Rising labour and materials costs are beginning to impede construction starts, potentially limiting new supply. As a result, we expect apartment landlords to benefit from the return of pricing power. In Germany, residential companies offer defensive growth potential, benefiting from strong demographics and a housing shortage. We also see opportunities in manufactured homes, UK student housing and Australia home builders.
Digital growth
Industrial: Warehouses are benefiting from exceptional demand across multiple fronts, including e-commerce fulfilment, reverse logistics (processing customer returns from online purchases), higher inventories, reshoring of manufacturing, and expansion into new categories such as grocery. The secular growth story is driving relentless appetite from institutional buyers, pushing asset values higher globally and prompting opportunistic selling by public owners. Although US industrial valuations are not unreasonable, we believe better values are available in Europe and Asia Pacific.
Cell towers: All three major US wireless carriers are in the market for the first time since 2014, aggressively deploying 5G equipment following the recent C-band spectrum auction. As a result, US tower leasing in 2022–23 may be the strongest in years. In addition, new 5G technologies and edge computing could provide additional business opportunities and revenue sources.
Data centres: Demand remains strong globally and development pipelines remain profitable. The private takeover bid in June for QTS Realty Trust represented a historically low cap rate for the sector, underscoring the enormous enthusiasm surrounding this industry. However, pricing power is skewed in favour of a small number of technology tenants that drive a substantial portion of leasing. We believe data centre landlords with more densely interconnected assets that are hard to replicate should stand out. We also see opportunities in China, where growth potential is higher.
Structural challenges
Retail: Foot traffic and retail sales have improved significantly, but mall owners have lost many tenants during the pandemic. We believe the sector’s outlook remains challenged by e-commerce headwinds and little ability for landlords to raise rents as they refill vacancies. Our selective exposure in the sector is concentrated in Class A malls in the US and in Continental Europe and Asia, where we believe discounted valuations and improving conditions offer attractive risk-adjusted upside potential.
Office: Despite the positive visual of workers returning to the office, leasing activity remains weak as businesses assess their future office needs in a world where hybrid working is the new reality. In the US, we estimate rents may decline in the near term by 5–10% in Sunbelt markets and 15–20% in coastal markets, reflecting the effect of hybrid working and oversupply. Internationally, we see pockets of opportunity, including Japan (economic recovery, reduced work-from-home impact), Singapore (strong tech demand, relocations within Asia Pacific) and Sweden (strong economic growth).
Jon Cheigh is chief investment officer and head of global real estate securities at Cohen & Steers. The views expressed above are his own and should not be taken as investment advice.