Know What You Own, Part 2 – Commercial Real Estate

That same newsletter from Part 1 just published another article.  This one was on the real estate market. 

And while it was not as misleading as the Nasdaq vs tech fund issue, it did completely gloss over the largest sectors of this asset class.

In the middle of this pandemic, the phrase “commercial real estate” is certain to generate images of shuttered retail shops and empty office buildings. 

And it is fair for you to say, “Why would I want to invest in Old Navy’s and office buildings?   I’m reading headlines of bankruptcies left and right.”  And I don’t disagree with you. 

Investing in commercial office real estate and retail shops does not feel good right now.  And it is easy to visualize how a portion of retail and offices may never re-open.

But if we are making a commercial real estate investment, we need to know what we own.

When we look at the market-cap weighted, commercial real estate index fund from Vanguard (ticker – VNQ), all the above topics are largely absent.  The top 10 holdings of this 186-security fund comprise 49% of the fund’s total assets. 

None of these top 10 holdings are office or retail REIT’s.  There are several cell tower and data storage companies, a self-storage firm, and a couple of multi-family operations.

It is safe to say that my cell phone and server usage is not going to diminish anytime soon.  So, I am pleased to be invested in cell towers and data storage firms. 

Despite some families struggling to pay rent now, I’m pleased to be invested in multi-family properties for the long-term.

The remaining half of the fund is made up of 176 firms.  And amongst these are more, smaller cell tower and data storage firms along with multi-family property management groups.  And there are absolutely office and retail firms.  Additionally, there are industrial, healthcare, and timberland focused real estate firms.

So, you can see that while the commercial real estate market is a little heavy on the top-end, it is well diversified.  And using a market-cap weighted fund means that you follow the collective opinions of all market participants. 

And one final note about all CEO’s and their teams at office and retail REIT’s.  You can be certain that they are not interested in failure.  They do not want to lose their jobs.

Despite being faced with a real headwind, they are fighting hard and will do everything it takes to recover and become successful again.  There is too much incentive not to put forth this effort.

While I do not know the answers to their solutions right now, I do expect and look forward to observing their creativity to navigate diminishing demand for their properties.

When there is uncertainty, diversification should shine.  That is why we will remain mechanical and not attempt to choose individual winners and losers.

Now that you know what you own in a commercial real estate fund, you should be a little more comfortable with an appropriate amount of exposure to this asset class.