With a cautious outlook as we move later cycle, we are actively positioning portfolios in case a recession occurs - an increasing likelihood, we believe. This includes making both asset allocation adjustments as well as tweaks within portfolios to include more defensive positions that we believe can continue driving value should a downturn occur.
Think of it as investing, but from a bit more of a cautious stance. Today, we're going to highlight an example of this defensive, opportunistic approach by highlighting real estate's comfortable positioning and a few of the opportunities we like within the sector.
A downturn is difficult on all financial assets, even defensively positioned ones. Real estate is no exception, and it has at times underperformed during the deflationary-driven recessions. But unlike past examples, we believe today's slowdown is different.
The driving force behind the economic weakness is a result of the negative effects of historically high inflation. If we compare this inflationary-driven environment to a similar one from the '70s and '80s, it was a period that saw public REITs, private real estate, and home prices, all outperform the broader equity markets, a very encouraging historical sign and something that we think may be repeatable today.
Real estate can perform well during challenging, inflationary times like today because steadily rising prices make it difficult to build competitive new real estate supply. Costs are rising, and wages are rising too, making new construction more expensive and resulting in rising rents on existing real estate. Taking that insight and pairing it with other factors, we have identified two areas that we deem as high-quality (i.e., sustainable growth and higher return on invested capital): medical office buildings and cell towers.
It doesn't matter how good or bad the economy is doing, people are always going to get sick and need help getting better. Medical office buildings are an area of real estate that we believe are well-positioned because of their demand and longevity. These office spaces are purpose-built for a variety of medical practices on, or adjacent to, a hospital campus to provide care at a lower cost than if the patient was treated at a hospital. This has resulted in a trend of 'offloading' surgeries and care to these medical office buildings.
Given the built-in demand for these properties as alternative ways to provide necessary healthcare, the need for these spaces will carry on for years to come. As a result, medical office buildings with long-term leases will be able to generate growth in many environments, creating an apt, stable investment in the real estate sector.
Quite the opposite of health care is cutting-edge technology, and in this case, 5G cellular in particular. This new wireless network not only generates lightning-fast speeds, but it is also providing unique opportunities within real estate. The secular growth in mobile data traffic and the subsequent development of 5G network by carriers sets the stage for cell towers and sites over the long term. In order to deploy and implement the new network, the 5G spectrum requires new cell site equipment on towers, which we expect will generate additional lease-amendment revenue for tower owners. The 5G spectrum also reduces cell site ranges compared to 4G spectrum, requiring carriers to add additional cell towers and sites.
5G has been a highly anticipated network advancement with a lot of promises. In return, carriers have committed to bringing this fast network to their customers. For the cell tower REITs, this commitment amounts to what we anticipate to be annual organic net operating income growth over the next 5 to 10 years. The best part? We believe this rate could be sustainable during a recession. Between the logistics of prepping existing towers for the new network and the lifespan of it, the long-term value is promising.
No matter the sector, economic cycle, or outlook, there will always be investment opportunities. The differentiating key to success is the commitment to an active approach and dedicated process to discover, vet, and appropriately allocate those opportunities.
This article was written by