Jared Feldman is the executive chairman of First National Realty Partners, leading the firm in institutional-quality acquisitions.
Unprecedented economic changes over the past few years have led to increased volatility in the market, prompting many investors to seek investments that provide both yield and stability. I believe this can be achieved by investing in necessity-based commercial real estate (CRE)—real estate assets with tenants that serve consumers’ daily needs by providing essential goods and services.
I’ve seen how necessity-based CRE can serve as a potential hedge against market volatility and believe that it continues to be a resilient investment, even in uncertain times.
Four Types Of Necessity-Based Assets
Necessity-based CRE includes grocery-anchored retail, unanchored neighborhood retail centers, workforce housing and distribution centers specializing in last-mile fulfillment. These asset types play a critical role in the local economy and have the potential to generate strong returns for investors when managed professionally.
At grocery-anchored retail centers, anchor tenants with strong credit profiles and longer base lease terms reduce the risks associated with nonpayment and vacancy. With grocery stores typically creating consistent and recurring foot traffic, these centers frequently attract high-quality secondary tenants, creating the potential for higher rents and additional income. Consumer spending on in-store staple grocery items tends to be noncyclical and largely insulated from macroeconomic volatility, making these assets resilient during shifts in the economy.
Neighborhood retail centers position a mix of retail, dining and service businesses close to consumers’ homes. They thrive by offering customers a convenient location to purchase their everyday necessities. With a tenant base that has shorter lease terms, the merchandising mix can be diversified to meet changing consumer trends and to weather economic downturns. Over time, rent rolls and property values tend to grow alongside the community, providing investors with the potential for strong risk-adjusted returns.
Workforce housing meets the needs of people seeking affordable housing without a long commute to work. Recently, high interest rates and elevated home prices have created significant barriers to homeownership, resulting in a large group of “renters by necessity.” This trend presents opportunities for investors in multifamily housing. While there is currently less capital available for developers, the combination of limited new housing supply, high demand and the formation of new households suggests that the “renter by necessity” trend will continue. As a result, annual rent growth may either meet or exceed the rate of inflation over time.
Regional distribution centers, located near consumers’ households, facilitate critical last-mile delivery systems to support the e-commerce economy. With retail e-commerce sales projected to account for 20.1% of total global retail sales in 2024, up from 18.8% in 2021, this growth is expected to continue to drive demand for these assets.
Resilience During Volatility
I believe that necessity-based real estate is less correlated to market volatility than other asset classes, making it a valuable component of a diversified investment portfolio. Historically, economic volatility and market disruptions have led to attractive acquisition prices for necessity-based CRE assets, presenting unique opportunities for savvy investors. For example, due to the length of lease terms in retail centers, rental prices have historically remained resilient during market downturns, providing a steady income stream versus other investment opportunities.
In my experience, necessity-based CRE has the ability to provide investors with a number of potential benefits including asset appreciation, predictable cash flow, tax benefits, inflation protection and diversification.
Future Insights
The necessity-based CRE landscape is constantly evolving, and remaining informed is important to stay ahead of the curve. Here are a few strategies to consider:
• Diversification: Whether investing directly into local CRE properties or investing with an investment firm, it’s important to allocate your capital across various property types and geographical locations to mitigate risks.
• Diligence: Leverage tools in data analytics, property management and demographic trends to enhance decision making and operational efficiencies. GIS and third-party cellphone data can help you to better understand customer purchasing power within a few miles of a center. Our firm uses these tools to determine the appropriate mix of tenants based on consumer preferences and needs in the area and can then perform a void analysis to identify tenants that are not in the area to help determine how vacancies at a center should be filled.
In addition, third-party cellphone tracking data can provide insight into how many times customers visit a center. Knowing how the stores in a center rank relative to their national averages is important to understanding both their health and long-term viability at the center.
• Monitoring Macroeconomic Trends: In a changing interest rate environment, I believe investors should actively monitor macro trends to look for opportunities to capitalize on shifts in market cycles. Pay attention to how grocery mergers are playing out to understand their potential to impact the competitive landscape.
While multifamily assets have historically benefitted from increasing rents due to demand traditionally outpacing supply, investors should follow the rate of new units coming into a market to better understand how that will impact rent growth in both the near and long term.
I recommend monitoring jobs data, consumer debt outstanding, inflation and interest rates to assess consumer strength. On the debt side, I recommend closely following five-year Treasury rates. This rate is important as it impacts our firm’s costs for new acquisitions and refinancing debt at existing properties. It also determines the potential sale price of the property.
Taking A Strategic Approach
In conclusion, I believe that necessity-based CRE may provide a hedge against economic volatility while offering investors unique potential in terms of asset appreciation, predictable cash flow and stability during volatile economic times. By staying informed and taking a strategic approach, you can capitalize on the opportunities within this dynamic asset class. Investors who leverage these insights will be better positioned to succeed in the ever-changing economic landscape.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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