On the most recent episode of the Behind the Markets podcast on Wharton Business Radio, hosts Jeremy Schwartz, director of research at WisdomTree, and Wharton finance professor Jeremy Siegel were joined by Scott Crowe, chief investment strategist at CenterSquare Investment Management to discuss real estate and the changing tides that are bringing about investment opportunities in the new economy.
Crowe discusses CenterSquare’s focus within real estate as the fourth largest active real estate investment firm, particularly within real estate trusts on the behalf of corporate public endowments, pension funds, and others, as well as a private real estate platform, and real estate credit lending. CenterSquare is also the subadvisor for mutual funds that are focused on real estate as well.
WisdomTree has partnered with CenterSquare, which provides the index for the WisdomTree New Economy Real Estate Fund (WTRE).
“The index that we have created is based on our research and ability at CenterSquare to identify those companies that are benefiting and growing from the changing demand patterns that are related to the new economy,” Crowe said.
The last decade or two have brought about big changes in the demand patterns that have been created around technology, demographics, and preferences, changes that were hugely accelerated by the onset of the pandemic, Crowe explained. Because real estate’s value is derived from its use, there have been clear divisions drawn between companies that have been able to accommodate and grow in this changing environment and those that have fallen behind, such as malls.
“Interestingly, what’s happened because of COVID is you’ve compressed ten years of trial, and trust, and technology into two years as it relates to the whole working remote,” Crowe said. “The obsolescence risk from technology has now shifted to the office sector.”
Winners in this new real estate world order will be the physical spaces that enable the technologies happening, such as data centers and cell towers that enable working from home, industrial warehouses that are home to the distribution centers for companies like Amazon that are capitalizing on online retail, and life sciences.
REITs, Cap Rates, and Inflation’s Impact
Real estate investing is split between two categories, core and non-core and Crowe explained that it came about with the arbitrary delineation of apartment buildings into non-core since the underlying credit relies on an individual person versus an institution.
“The REIT market, because it’s part of the equity market ecosystem with competitive economic pressures, doesn’t really have the luxury of arbitrary definitions because it’s profit-seeking and so if you look at the REIT market today, it’s actually pretty advanced in its adoption of a lot of these ‘non-core’ sectors,” Crowe said.
A chief concern as interest rates continue to rise is rent growth and cap rates (the real estate asset’s yield), and Crowe anticipates negative leverage for the first year of investment as debts are higher than the cap rate, with no way for the cap rate to compress any further in a rising interest rate environment. What’s different this time around though is the likelihood of persistent inflation, which hasn’t been the case for decades.
“I think that inflation is going to be sticky, it’s going to continue to come through in the numbers, and one of the best ways to actually capture that is through the residential rental market,” Crowe said.
Current markets are experiencing a subdued supply response because of the confluence of events that have created supply chain issues, labor shortages, and more, meaning that rent can remain high even if the economy slows. It means that there is a good opportunity to look ahead in the right kinds of real estate, Crowe explained.
The fund is one of what Crowe described as “the infrastructure play on the new economy” and focuses on these areas of real estate that are expected to see increasing demand and growth as they underpin this economic transition driven by technology.
WTRE invests globally in real estate companies with exposure to technology, science, or eCommerce-related businesses. The fund carries an expense ratio of 0.58% and the largest country allocations include the U.S. at 57.94%, Australia at 7.21%, the UK at 6.82%, Japan at 6.01%, and several other countries.
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