Real estate investors don’t have much to write home about this year compared with last year when they beat the stock market by a wide swath. The benchmark real estate exchange traded fund, Vanguard REIT ETF (VNQ), lost 1.5% year to date, through July 17, after rallying 30% in 2014. The SPDR S&P 500 ETF (SPY) climbed 4.3% and 13% over the same periods. Foreign real estate markets, as tracked by Vanguard Global ex-US Real Estate ETF (VNQI), surged 5.3% year to date after adding 2.2% last year.
To zero in on the best areas of real estate invest in now and get an overall assessment of the market, I checked in with Burl East. He serves as CEO of American Assets Capital Advisers, in San Diego, Calif. with $2.65 billion under management. He is also sub-adviser to the Altegris/AACA Real Estate Long Short Fund (RAAIX), overseeing $111 in assets. His fund gained 4.3% year to date and 13.8% in the past year, through July 17.
Ho: What are your three most favorite real estate investments now and why?
East: Our three favorite areas are cell towers, data centers, and water. Each of these play into a situation in which there is a basic, long-term fundamental mismatch between supply and demand. Cell towers and data centers are the purest play in real estate on demand for mobile bandwidth. Water plays into the huge Western drought combined with the fact that California as a market and state has spent almost nothing on water infrastructure in 30 years.
Ho: How are some real estate companies working to solve California’s drought crisis?
East: For the past four years, California has been facing one of worst droughts in the history of the country. California-based real estate companies are avidly working to combat its repercussions. At 30,000 feet, most real estate companies are already water efficient. Low-flow plumbing and thoughtful planning have been part of the California landscape for a number of decades. Larger, newer office and mixed-use projects are typically LEED-certified. Newer apartment communities feature water-saving measures.
Home builders are starting to use drought-resistant landscaping as well. Golf course management companies have taken to removing grass between the holes and replacing it with desert landscaping, which saves significant water. Hudson Pacific Properties’ (HPP) new development, ICON at Sunset, will be LEED Gold certified, which uses 20% less water than the industry baseline. Having said all this, the drought Californians are facing is not solvable through these measures, or through innovative real estate infrastructure developments. Instead, it is solvable with thoughtful state-level planning and newly engineered sources of sustainable supply.