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The Big Four

I recently read an article with the above title. It contained some interesting information and validated a part of our strategy, but more importantly, it underscored the absolute necessity of critical thinking… and reading.

This article laid out the top four commercial real estate asset classes (Can you guess what they are? In order?) and made some factual, but incomplete, assertions about the potential performance of those asset classes moving forward.

I won’t keep you in suspense any longer, they are:

1. Multifamily

2. Industrial

3. Retail

4. Office

The performance of these asset classes was measured using repeat-sale analysis, which is based on properties that have traded more than once during a period with no significant change in building characteristics between sales.

When reading these types of summary articles, it’s crucial to know where the data came from (CoStar in this case–a solid source), what is being measured, and what conclusions are being drawn.

If you’ve ever read an investment offering or advertisement, you’re probably familiar with the disclaimer, “Past performance is not indicative of future results.” Can I get an amen?! While the past performance of retail assets may have been strong, I’m guessing you’re not lining up to invest in shopping malls or retail strip centers.

When you delve further into this article, the authors confess, “Malls, strip malls, and shopping plazas were hit especially hard, and real estate services company CBRE predicts a 20% reduction in U.S. retail real estate inventory by 2025.”

The weaknesses in retail were already apparent pre-COVID-19, but the pandemic put the proverbial nail in the coffin for many struggling retailers.

What about office?

Office is interesting. Prior to COVID-19, there was a massive expansion of office space over the previous decade, to the tune of one billion square feet. However, much of that was concentrated in Silicon Valley, and, as we all know well by this point, COVID-19 has dramatically changed how many of us work, and this very well may be permanent. Several of the country’s largest employers now have permanent policies in place, allowing employees to work from home anywhere from 50 to 100% of the time, indefinitely.

Industrial, as you may imagine, has a similar story.

While the high-level performance of the asset class has been strong, there has been a massive consolidation of ownership in the sector, as much of retail has moved, and is moving online. The percentage of investors benefiting from the performance of the asset class relative to massive corporations like Amazon, Walmart, and Target is very low.

As good stewards of your capital, we’re committed critically to the past, as well as the future. We always “read between the lines” and take the time to evaluate the sources and the accuracy of our information.

We’re all constantly bombarded with information, and it’s often tempting to do a quick scan of an article or headline, and move on, especially if that initial information confirms our bias. But, as the old saying goes, the devil is in the details, and taking the time to read and think critically will have a material impact on your life, your future, and your finances.