What a difference a year can make. At this time in 2020, businesses across the world were shuttered and investors were questioning how the global economy could possibly rebound. Now, fast forward a year, the US stock market continues to make new highs, the economy is accelerating, and we have one of the hottest real estate markets on record.
We have written extensively about the red-hot market for residential, single-family homes in the U.S. However, the residential market is not the only real estate market experiencing record demand. The need for warehouse space is also soaring to all-time highs. As recently reported in the Wall Street Journal, “The U.S. warehouse market is starting to look like the red-hot housing sector, as companies jockey for scarce distribution space to meet surging e-commerce demand. The competition is driving up industrial rents as retailers and logistics providers race to move goods closer to population centers, with some engaging in bidding wars for the most coveted sites.”
Commercial real estate investors focused on warehousing are experiencing an unprecedented boom. The pandemic drastically altered consumer buying behavior, marked by a dramatic increase in online sales. Commercial real estate investments focused on serving the warehousing and logistics sectors have been well positioned to profit from this change. As covered in the article, “The pandemic and lockdowns that shuttered many storefronts and kept people at home supercharged online sales, pushing retailers to speed up investments in digital shopping capabilities. E-commerce will account for 26% of all U.S. retail sales by 2025, up from an estimated 20% in 2020. Prices are rising at a particularly strong rate for logistics space near ports and cities, and for big-box warehouses such as those used in large online fulfillment operations.”
As we have discussed in the past, real estate investing is not monolithic. The fundamentals that drive one market, such as residential housing, can be drastically different from those driving commercial markets such as warehousing and hospitality. Case in point, the hospitality real estate market – such as hotels and restaurants – have struggled mightily since the onset of the pandemic.
This is another great example why investors not only need diversification among asset classes (such as stocks, bonds, etc.) but potentially within the real estate asset class as well. Since we started our fund in 2015, we have been vocal proponents of adding exposure to residential real estate lending to investment portfolios. We have never pitched this as a replacement for commercial real estate investing. Rather, we believe that residential real estate lending is a solid and proven complement to commercial real estate investing (COVID19 Causing Significant Stress in Commercial Real Estate Here is How Investors Can Diversify).
The one constant in investing continues to be change. Sectors and markets that are hot today, can reverse and cool down tomorrow. While Aloha Capital lends solely on residential real estate, we do recommend that investors be diversified within and across different categories of real estate. That said, we believe the fundamentals underpinning residential housing have historically been as stable as most any asset class, and further, will continue to support a strong market for some time. However, this may work best as part of a balanced investment portfolio and real estate allocation more broadly.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.