With Covid-19 bringing huge dispersions to the performance of different real estate asset classes, real estate investment firm Lionstone Investments is using data to inform its investment strategy and chose which markets are better poised for growth.

Speaking at the Investment Magazine Fiduciary Investors Symposium on Wednesday, Lionstone CIO Bryan Sanchez explained a strategy that uses US labor market data to make sense of the country’s real estate market.

Sanchez looked at which of 283 job categories are fastest growing and earning the most money–and in particular thriving during Covid-19 and driving the digital economy. He then determined which cities had the most workers in those jobs, along with the fastest growth in those sectors.

“Austin, Texas; Raleigh, North Carolina; Dallas, Texas; Phoenix, Arizona, these are places that are really primed for growth in our opinion because of the concentration of jobs that are there and the growth of those jobs,” Sanchez said.

 

With the growth of the digital economy, companies are increasingly choosing to locate to cities where people want to live, as these cities attract the best human capital, Sanchez said.

And most people, particularly those thriving in the digital economy, want to access all elements of their daily life within a 30-minute commute which could be by foot, bike, public transit or car, he said.

“And so that means everybody’s geography is shrinking,” Sanchez said. “We think the pandemic is going to reveal to the world how important wellness is, and so there are some elements about mixed-use development that we think facilitate wellness to a greater degree… so we think it’s going to be much, much more important in the US in the next decade.”

Investors should be particularly wary about locational obsolescence, Sanchez said. Unlike the physical obsolescence of an old building, locational obsolescence cannot be fixed, he said. But even in the right location, the obsolescence of buildings is a greater concern today than it has been for a long time, Sanchez said.

“Most of us are going to go back to the office, but we may not go back as much as we did before and we’re going to use the office differently,” Sanchez said. “And the way the office was built 30 years ago is likely not to be what we need in the 2020s. And so that risk of physical obsolescence is probably higher today than it’s been at least in that sector in a very long time.”

With enormous dispersions opening up between sectors such as industrial and retail property, Australian investors will be increasingly looking offshore for real estate opportunities, said Mary Power, senior consultant at JANA Investment Advisers.

“We’ve been through a period where all three sectors [office, retail, industrial] delivered very similar returns for quite a long period of time,” Power said.

“Now, there’s this huge dispersion and I think the view of going offshore, particularly when you’ve got a fund that’s got positive cash flow, if you can up weighting to sectors like, say, industrial or some sectors that you can’t necessarily get big exposures to here [in Australia], including medical, office, single-family housing, those sorts of sectors, then yes, there is a definite thesis to pursue those types of investments.”

The build-to-rent sector is something investors are “really significantly turning their minds to” owing to its success overseas, Power said, but high land prices are hampering its development and more government assistance may be necessary.

You can see the full interview on the Fiduciary Investors Symposium digital hub.

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.
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