Lauren Ferry, Head of Portfolio Strategists at Nuveen, Randy Schwimmer, Co-head of Senior Lending at Churchill Asset Management, and Shawn Lese, Chief Investment Officer for the Americas at Nuveen Real Estate, outline the current state of the market, the post-pandemic path to recovery, and the implications on real estate and private credit.
“The economic growth that we’ve seen so far in the U.S. is without a question a response to the massive fiscal and monetary stimulus,” says Ferry.
The stimulus, combined with looser lockdown restrictions, has fueled consumer spending, which has led output to rise again to near pre-pandemic levels. Over the past few months, the macroeconomic backdrop has improved substantially, with growth expectations having increased significantly and uncertainty having steadily declined. During the pandemic, almost all real estate fell initially, but only for a limited amount of time.
This in sharp contrast to what happened during the Global Financial Crisis, where all sectors suffered significant valuation declines and took years to recover. Because of extensive steps taken in monetary and fiscal policy, policymakers were able to prevent the operational crisis of the pandemic, which only affects certain sectors for which demand no longer exists, from turning into the sort of capital crisis, which is represented by a general lack of financial confidence that negatively impacts all asset classes, that plagued 2008’s great recession.
The operational crisis at the beginning of the pandemic puts investors in the position to “benefit from the momentum of the currently operationally successful sectors, and then… leverage the short-term undervalued properties that are challenged for some pretty attractive bids,” says Lese.
Moreover, because consumers’ savings ratio doubled over the course of the pandemic, as the vaccine roll-out continues, those savings will drive demand for housing, ecommerce, entertainment, and travel. The recent economic recovery is also seen to be supporting private credit, which Schwimmer defines as private companies typically owned by private equity firms. The loans are smaller, and as a result, less liquid, and this illiquidity demands a higher return.
“The combination of premium return and lack of correlation with a lot of the headline risk comes with volatility… has made the asset class pretty popular,” Schwimmer says.
Moreover, as economic outlook and corporate earnings expectations are increasing, competition for better assets is also growing, and credit markets are exceeding pre-covid risk levels. As economic recovery continues, the natural concern is inflation. Inflation expectations are up considerably. The protection that investing in real estate offers from inflation is substantial, as real estate delivers cash flow, which can be received on a periodic basis. Lastly, it’s important to note that though markets have moved to reflect this progress and economic recovery, there’s still a substantial employment gap, as we remain around eight million jobs shy of where we were at the beginning of 2020.
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