For nearly 20 years, strong demand for office properties in major city centres around the world has driven a lot of the total returns in the REIT space, “at least for the period up until the Great Recession,” says portfolio manager Chip McKinley.
Structural changes related to regulation, technology and demographics are now leading to a shift, says McKinley, who’s senior vice-president and portfolio manager with Cohen & Steers in New York.
“The ability to work remotely [is] having a big impact on demand for office space,” he says, noting that such changes “are forming longer-term headwinds [for] office properties, especially in big financial markets like New York and London.”
The real estate investment community has a lot of questions about how these changes will affect the performance of REITs, says McKinley, who manages the Renaissance Global Real Estate Fund, among other real estate funds.
One thing he does know is that even though history often repeats itself–especially in cyclical sectors—“even solid past returns don’t have any bearing on future returns because […] where those returns are generated from may or may not persist.”
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Demand for traditional office space properties is likely to continue to fall, meaning returns in the REIT space will come from another source, McKinley says. Banks and other financial services firms are trying to rationalize costs, he says, and that includes “rental costs on their offices. They’re trying to cram more people into the same space, and this basically diminishes total demand for office space in some of the [big] city centres.”
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He’s all right with that. The main reason is “there are other property types that are experiencing cyclical upswings, or even structural or secular upswings that can actually lead returns for the next 10, 20 years,” says McKinley. “Property types that come to mind are things like data centres and cell towers, and even logistics warehouse space.”
The common thread that ties all of these properties together is the rise of e-commerce.
As McKinley explains, the shift from brick-and-mortar business models and retail properties is largely driven, in the U.S., by “the disruptive force of Amazon” and other similar players.
On the upside, “A lot of those gains are being handed over to the e-commerce retailers, which all depend on the different property types that are suited to their businesses.” In other words, e-commerce retailers have different needs than traditional retailers, and the warehouses and properties they use reflect that.
McKinley is monitoring demand for cell towers. “To a lesser but still very significant extent, cell towers are becoming more prominent. A lot of people are doing banking and everything else on cellphones and, as new and faster networks are being rolled out, we will conduct more and more of our lives on mobile devices.”
The impact is likely to be increased demand for cell towers as well as the need for more spaces that store and process data. Says McKinley: “We’ll continue to see demand accelerate for the indefinite future.”
He’s also watching “the massive global shift from on-site servers for data storage and processing to the cloud, which is really nothing more than a massive number of servers that are owned by the likes of Amazon, Google and other companies.” Those servers require physical data centers, so demand for those “is absolutely massive, and there are REITs that own, operate and capture the economics for all of the new, different property types.”
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