Our Outlook for Three Property Types at Inflection Points

U.S. property types that outperformed in 2021—residential, industrial and self storage—have posted steep declines this year, as rising rates and inflationary pressures have fueled a rotation into value stocks. We believe these real estate sectors are now at inflection points, with our outlook for them varying.

We believe the strength of the residential rental real estate market can persist thanks to longer-term tailwinds. The residential real estate sector—composed primarily of apartments and single-family rentals—has produced strong returns in recent years. We remain constructive on the sector. We expect that the outsized rent growth we saw in recent years will slow, but low housing inventory should help support moderate rent growth moving forward. To date, first-quarter earnings have validated our optimistic view, with companies reporting strong operating results.

Construction of new homes over the last decade has slowed significantly from historical levels and has not kept pace with demand. This “underbuilding gap,” which will take years to solve, has made homeownership less affordable and less accessible, and, as a result, it also has increased the attractiveness of renting. Other tailwinds are supporting the sector too, including shifting demographics and changing housing preferences.

We find that industrial demand remains robust, but valuations require discipline. The rise of e-commerce in recent years has spurred demand for industrial real estate, driving up rents and prices across markets. Long-term demand drivers show no signs of slowing. However, increasing valuations in many markets and the prospect for new supply growth led us to a more cautious overall view earlier this year. More recently, stocks in the sector sold off meaningfully following comments about reduced demand from Amazon’s management team. We believe the pullback has created company-specific opportunities for a selective, active manager.

We believe self storage warrants caution, though opportunities exist. We maintained a level of caution around valuations after the sector’s strong 2021 performance, and we hold an underweight view of the property type. However, we do believe recent weakness has created select opportunities in certain markets to add exposure to this economically defensive asset class at more attractive prices.

Overall, we believe capturing these opportunities, and others across U.S. property types and regions, requires a disciplined, actively managed investment approach that can help mitigate the risks of rising rates and a slowing economy.

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