While real estate securities had a lower loss for the year than some other asset classes, increasing interest rates and shifts in the sector held back some growth prospects.
Real estate investment trusts (REITs) comprise many different types of real estate including office buildings, shopping malls, warehouses, and apartment buildings. They all need prodigious amounts of capital, so borrowing is generally necessary. Offsetting this increase in rates, three factors seemed to have helped limit the losses in REITs:
- The economy continued to grow which continues to require new and improved apartment construction, and increasing demands for office space, warehouses, etc.
- The reality of increasing interest rates and the prospect of further rate hikes led REITs to be comparatively undervalued at the beginning of 2018.
- By its nature, real estate also tends to be a defensive investment and a place that money seeking shelter goes when the economy begins to slow.
Real estate in general has had good returns since its correction in the financial crisis and some markets, such as the Bay Area, have come back very strongly. When we look on a national or global basis, however, there are still comparative bargains and it takes experts to determine bargains from poor investments. Shifting demographics affect areas, as do shifts in the way we live and work. Some shopping malls are now nearly empty while others are thriving. Also, our ever-growing economy needs office space, but office sharing is on the rise with firms like WeWork.
These constant shifts require that we use investment managers who are well aware of how each of these shifts affect each investment. It takes intimate knowledge of each area’s markets to discover them and know how to profit from them. We believe we have those managers in place and we are ever-vigilant in our reviews of their performance.