The 2020s have been quite the decade for commercial real estate (“CRE”) so far.
That’s true for the housing market, too. Those personal properties have seen their prices rise at a staggering rate since 2020. According to the Case-Shiller U.S. National Home Price Index, national home prices are up some 50% since March 2020.
It’s been quite a boom, but things have been less cheery for CRE.
I mentioned in Monday’s writeup how publicly traded “real estate has plenty more to move.” That’s partially (though not entirely) because of how depressed it’s been, comparatively speaking.
The financial sector has climbed 31.78% year-to-date, communication services have gained 31.30%, and the industrial sector is up 24.07%. In fact, out of the 11 Global Industry Classification Standard (“GICS”) sectors, only two are coming in at single digits: healthcare at 8.55% and real estate at 6.44%.
As I also wrote:
There are multiple reasons for this, many of which my team and I have discussed before. They range from misperceptions about real estate investment trusts’ reliance on debt and, therefore, interest rates… to a wave of commercial real estate debt coming due… to office landlords weighing down everyone’s opinion of how well the larger sector can perform.
But considering the continuing health of the larger sector, with more-than-manageable balance sheets and stellar leaders making strategic buy and sell decisions every day, I see real estate’s last-place position merely as an indication of greater profit potential going into 2025.
I stand by that.
However, there is one major piece to the positive puzzle I didn’t mention yesterday… the fact that Donald Trump will be taking office in just two months.
I’ve already told you all that I have very high hopes for the larger economy under his administration. But let me get much more focused today by delving into CRE specifically and how well I expect it to perform from here.
Trump the Builder
Having known the man for years, I can tell you Donald J. Trump is a real estate man through and through.
Hotels. Office Towers. Golf Courses. Those are his primary holdings, all of which I incidentally visited in 2014 and 2015 while writing my book The Trump Factor: Unlocking the Secrets Behind the Trump Empire.
Those impressive properties, along with his general business sense and ability to work a crowd, helped make him a billionaire. And I know firsthand that commercial real estate still holds a special place in his life.
None of this is to say that I think he’ll give sweetheart deals to CRE holders – only that he understands how to bring value to the sector… because he knows how much value it can bring to everything around it.
One giant factor in real estate value, of course, is location. Property increases or declines in price based on where it’s situated. If it’s in a prosperous area with healthy consumers and easy access to important routes and resources, then its value will continue to rise.
So, consider how much CRE opportunity there would be if the entire American economy became more prosperous with even more healthy consumers?
Another big drag on CRE is regulation. It was interesting to hear Trump speak with Joe Rogan about how excessive regulations (environmental or otherwise) can sink even a multi-billion-dollar project:
I had a project in Louisiana, built a big [liquified natural gas] plant. It was for 14 years, it was going to cost $18 billion, one of the biggest, like the Empire State Building, laying down on its side times four, massive, on the coast, on the Gulf Coast. And they said, “Sir, they’re going to give it up.” I said, “They shouldn’t give it up. What’s the problem?”
“They can’t get their environmental.” They had environmental permits that would fill this whole room up to the ceiling. And they said there was one mistake on one little line, they wanted to do it all over again.
Making the Byzantine system that is construction regulation more efficient would be a huge boon for CRE.
That’s why I expect expanded opportunity sets for so many landlord categories. It’s just what tends to happen under a pro-business presidential administration that’s backed by both houses of Congress (as has been largely confirmed).
Everyone benefits. With lower taxes and regulations for businesses and individuals alike, Americans will have more opportunity to work… to save… and to spend.
As such, I can’t help but be bullish about certain retail REITs, including:
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Regency Centers (REG)
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Kimco Realty (KIM)
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Realty Income (O)
I’m even bullish on select mall REITs like Simon Property Group (SPG). It turns out that the appeal of so many shops in one space hasn’t changed. There were just too many of these properties, a number that needed to be culled.
Now that competition is sparser, I expect the already well-placed and expertly-run SPG to benefit from an influx of emboldened consumers in the foreseeable future.
Commercial Real Estate’s Prospects Are Already on the Rise
I also have to note how, Trump or no Trump, CRE is stabilizing. We just learned from CBRE, the global leader in such services and investments, that sector-specific lending made noteworthy moves this past quarter.
To quote it directly:
The CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., rose by 13% from Q2 2024 and 15% year-over-year, reflecting improved lending activity. The index closed Q3 2024 at a value of 214, nearing the five-year pre-pandemic average of 229.
That’s a big deal since financial institutions were previously leery about lending to CRE-specific businesses. They knew that landlords were (and still are) facing a wave of debt coming due. And they were concerned about how those businesses – still impacted by the shutdowns – were going to be able to pay them back.
But that sentiment seems to be shifting, which means there’s already room for growth one way or the other.
Here’s another trend that Trump’s next presidency can only add to: the rise of certain kinds of real estate.
Now, I pointed out yesterday how more and more major companies are bringing employees back to the office. And while that’s a definite positive sign for office landlords and CRE in general, I’m “keeping my eye on it.”
There’s still a lot of ground to be reclaimed in that battle before I go all-in on office real estate investment trusts (“REITs”). I can’t stress enough how damaging the shutdowns were to them – and so many other businesses.
Yet there were also areas of the economy that actually sped up… and haven’t slowed down since. Think artificial intelligence, e-commerce, and other online activities.
As I explain in REITs for Dummies, “The appeal and importance of real estate doesn’t change. But the way we interact with that real estate certainly has over the millennia.”
That’s why I’m so bullish on the “tech trifecta” sectors: data centers, cell towers, and logistics like warehouses and fulfillment space. And, yes, data centers and cell towers are commercial real estate these days.
That’s how there are entire REITs dedicated to them. And they remain an area of focus for me.
What happens when you take a good U.S. company and give it even more opportunity to excel?
You get one more building block in the Make America Great Again movement. Which I, for one, can’t wait to see really get going.
Regards,
Brad Thomas
Editor, Wide Moat Daily
MAILBAG
What sectors do you believe may soar under Trump’s presidency? Write us at feedback@widemoatresearch.com.