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Investment Commentary

Commercial real estate: Far more than failing shopping malls & empty offices

By Jonathan Henshue | Johnson Financial Group • February 10, 2022

5 minute read time

The last few years have produced many outsized market winners, some with periods of eye-popping results. For example, the pandemic propelled video communications provider Zoom Video and e-commerce platform Shopify into our lives, and these companies experienced fast-tracked growth, condensing multiple years of business gains into a period of months.

It may come as a surprise, but some areas of real estate have also benefitted tremendously from the changes we've witnessed. Persistent headlines about the death of offices and malls might lead you to conclude that commercial real estate is uniformly challenged, which is far from reality.

When considering commercial real estate, what typically comes to mind for many are the offices, apartments, and retail centers we frequently engage with. But there is a growing proportion of the REIT universe outside the traditional sectors historically associated with commercial real estate.

That evolution shows up in the assets represented by real estate investment trusts (REITs), which are professionally managed companies that own and operate diverse real estate assets and are the simplest way to gain access to real estate investments.

A new landscape of commercial real estate

The REIT market has evolved meaningfully in the last 20 years, increasingly supporting and benefitting from the continued evolution of our economy. For example: 

  • Cell towers are critical infrastructure enabling our daily communications. 
  • Data centers facilitate the cloud-based platforms modern business has come to rely on.
  • Even the traditional industrial sector has evolved to become a central component of our digital society, providing the warehouse and logistics facilities needed to enable the growing prominence of online shopping.

The following chart provides a snapshot of how so-called alternative sectors have become a major part of the overall REIT makeup.

The following chart provides a snapshot of how so-called alternative sectors have become a major part of the overall REIT makeup.

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Performance divergence means investment opportunity

As the REIT landscape has changed, investment performance of its subsectors has diverged. The average performance disparity between the top and bottom real estate sectors is 34 percentage points in recent years. That disparity provides an attractive opportunity set for active management.

At Johnson Financial Group, we typically include real estate as part of the complements allocation, with the asset class providing an additional source of income and a hedge against rising inflation. We believe experienced and focused investment teams can identify the most attractively valued sectors and companies and to position portfolios accordingly. These managers focus on the specifics of subsectors, including their distinct types of tenants and lease durations and how they are likely to perform at different times during the business cycle.

Despite the headlines proclaiming the challenges commercial real estate faces, we believe exposure to the asset class can be a valuable part of a diversified investment portfolio. In fact, the transition REITs have undergone in recent decades may even position some sectors to thrive in the years to come.

This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Johnson Wealth Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE

ABOUT THE AUTHOR

Jonathan Henshue

Jonathan Henshue

VP Director of Complements Strategy | Johnson Financial Group

In his role as VP Director of Complements Strategy, Jon is responsible for conducting due diligence and selecting investment managers for use across the JFG platform. Jon’s areas of coverage include complementary investments and US growth equity managers. He leads the Complements Strategy Group, which oversees portfolio construction of complementary asset classes, and also serves as a member of the firm's Investment Committee.