“While the industrial sector has outperformed for more than five years, we believe that its strong momentum has further to run. Even after last year’s surge, America’s e-commerce penetration remains well below levels in the United Kingdom, South Korea and China. Capital rates have compressed, but they remain reasonable, in our view, considering the sector’s strong growth prospects. To the extent that valuations are elevated, development may provide an attractive alternative to acquisitions,” the report noted.
Residential real estate, especially low-rise apartments and single family homes, also will benefit from the current climate and should be overweighted, DWS said.
“We believe that an acute housing shortage―the national rental vacancy rate is near its lowest level since the 1980s, a legacy of the global financial crisis homebuilding bust—will support residential property,” the report said. “However, in our view, an ongoing migration of aging millennials to the suburbs, a trend that first surfaced in 2015, will favor garden apartments and single-family rentals over high-rise assets."
The losers in this sector battle will be retail space, which DWS said should be underweighted, and office space, which should be strongly underweighted, he said.
The Covid crisis leveled a heavy blow to the retail sector. Store closures and bankruptcies “throttled” the retail space market and “the relentless challenge posed by e-commerce to the viability of physical retail centers” will continue. Malls will be hurt the most, while necessity- and service-oriented neighborhood and community centers do not face as great of a challenge, the report said.
Office space comes out at the bottom of investment possibilities, which DWS said should be strongly underweighted.
“Office [space] was the only sector where performance deteriorated in the first quarter of 2021 [and] workplace occupancy remained depressed. The challenges facing the office sector should not be understated. The first quarter registered the largest decline of net absorption in history, eclipsing the worst quarters of the global financial crisis, and vacancies increased to their highest level since 2012.
“Some investors may have written off the sector, believing that corporate America’s embrace of remote working has rendered office space obsolete. We disagree. In our view, offices will retain an important role as centers of collaboration, training, innovation, and business development. Nevertheless, it is prudent, in our view, to consider the risks posed by remote working, which may play out over time,” DWS said.
Not only are sectors being hit differently, but some regions of the country are faring better than others. The Sun Belt and lower-cost markets in the Mountain West will have an advantage over the large urban areas like New York, Chicago and Los Angeles, DWS said.
Advisors can bring value to their clients by helping to sort out the winners and losers within real estate investing, White said.