Housing Isn’t a Bubble, Offices Aren’t Dead, and Malls Can Thrive, This Real Estate Investor Says

Tripp oversees $144 billion as global chief investment officer and head of investments for Nuveen Real Estate, one of the nation’s largest real estate investment managers, which scooped up more than $10 billion in U.S. property last year. While many other investors were bearish on retail property as the pandemic hit, Tripp rightly spotted opportunities among the subset of retailers that correctly anticipated how shoppers might want to buy in a pandemic. Tripp talked with Barron’s from Davidson, N.C., about some of her latest contrarian ideas, including why renting may be preferred to owning a home, why office space isn’t dead, and the best types of malls, senior housing, and industrials to own. An edited version of our conversation follows.

Barron’s: What is the state of the housing market?

Carly Tripp: There’s still a three-to-five-million unit shortage across the U.S. There was a lot of scar tissue from the housing crisis; investors were skittish to invest and home builders were slow to build. We had a whole decade of underbuilding and are playing catch-up now. Housing starts in multifamily units are at record highs. Delivery delays have moved from an average of seven months to more than 16 months. It’s a perfect recipe for a strengthening in the overall housing market.

Home prices have soared. Is this a bubble?

There has been a ton of appreciation postpandemic, but people aren’t considering that mortgage rates have come down so much. If you look at median housing prices between 2006 and 2021 and bump that up against the cost of a mortgage based on rates today, a $250,000 home in 2006 is a $400,000 home today. Even in the top 20 composite markets, in inflation-adjusted terms we are just back to 2007 levels. I don’t think there’s a bubble.

Do you worry about affordability?

Yes, largely because of the low supply of affordable housing. The percentage of new-home builds [selling for] $200,000 or under is less than 2% of [available] stock. People just aren’t building smaller, more affordable starter homes. If a builder can maximize profits and build at a higher price point, that is what they do. For 2022, one of the areas I like is affordable housing, which is undersupplied and underserved. We see more public-private partnerships there, and if Build Back Better gets done, there’s a large chunk [of money] committed to developing affordable housing.

There’s also a growing group of people who want to rent versus own—one reason we like the emerging area of single-family rentals. When my parents were starting a family, wealth creation came from owning a home. Today, a lot of people have other ways to access wealth creation. Right now, you can invest that down payment in the market, Bitcoin, or Robinhood. Consumers are becoming more educated in how to invest their dollars—and that they have choice in what to do with their money.

Where within the country are you finding the most opportunities?

Migration patterns have been staggering. This exodus from coastal cities into the Sunbelt—across the Carolinas, Georgia, and Texas—has been massive. Living outdoors in warmer climates with access to beaches and mountains is how people want to live today, and tax advantages for corporations is top of mind, too. Technology has created these micro urban areas across the U.S. that didn’t exist before. There are a lot of places where people can get gainful employment and access to education for their families. The coastal cities are not going to go away, but there’s a lot more population dispersion.

I also love 55+ housing, where there is a feel of like-minded people close to retiring, or empty nesters, who have access to tennis, pickleball, and physical amenities, [near] family members. There’s more disruption risk for things like memory care, which can change if the technology changes.

How does this migration impact the outlook for office space?

Companies recognize the benefits of having people in one place and the need to draw people back to the office. So, you are seeing [amenities like] food and gyms. A lot of large institutional and private-equity investors are going to make a bet on trophy offices again in coastal markets. That will open back up in 2022.

How much of the workforce is expected to return to office?

Long term, the disruption and decrease in demand [for office space] is likely 10%. It’s going to vary by location and type. We are still very bullish on specialty-use property like studios, medical life sciences, and highly amenitized, smaller office buildings across the Sunbelt. In a lot of these markets where people are moving, office is undersupplied. There’s still a lot of positive momentum. Selection is key, and there’s some risk with the need to transition from heavy carbon usage to net-zero usage. There’s no bigger risk for that [energy] transition than in office space.

Speaking of the energy transition, how should real estate investors be thinking about climate change and decarbonization?

Nuveen Real Estate committed to net-zero [emissions] by 2040. We focus on evaluating every single asset we own, and [the analysis] for anything we buy includes cost to transition. Frankly, we need a better renewable grid across the U.S. Every one of our assets goes through a model that assesses storm, fire, and flood risk, as well as the local regulatory risk, at the cross-street level of detail. For example, it includes topography: New York can build seawalls, but Miami can’t because the ground is a sponge. We assess all of that from a value-at-risk basis. If it’s too high over a 20-year period, we won’t invest.

How will rising interest rates affect the opportunity?

Real estate tends to do better than other [areas] in inflationary times. You have embedded lease structures with annual increases that tend to outpace inflation, and structures that pass through any increases of expenses to tenants. But inflation is a huge risk to our economy, and the drivers and facilitators of inflation are a bigger risk.

How so?

Look at the labor shortage; that’s never good. Supply shortages are going to take a long time to work through the system, and depend on international geographies’ tactics around Covid. We are also dealing with the pressure cooker of inflation. The Fed is taking a more hawkish stance but can only control short-term rates. Investors control long-term rates, so pay very close attention to the yield curve. That will be the biggest leading indicator [for trouble]. If the yield curve starts to get flatter, and if [the Fed] keeps raising rates on the short end and demand on the long-end keeps rates relatively low, that would concern me. Pay attention if [the yield curve is] flattening and definitely if it’s inverting.

What does that mean for your portfolio?

We are continuing to invest where we have high conviction, which is around housing as a necessity. Industrial is still undersupplied. We are the seventh-largest owner of U.S. industrial property [warehouses, logistics facilities, and last-mile property that serves as the last point between the supply chain and delivery to the end customer]. We are leasing space on a daily basis and see firsthand how strong it is. There’s no indication of a slowdown yet. Demand continues to outpace any previous records from a total leasing-volume perspective. Within industrials nationally, the vacancy rate is under 4%.

Given the increase in e-commerce and the move to “just-in-time” inventory management, demand for last-mile has increased in recent years, and that is our focus. We are also bullish on alternative sectors like storage and medical offices—both are necessity-based—as well as life sciences, which has incredible tailwinds.

There’s a lot of pessimism about retail, and malls especially.

Were we as a country oversupplied on bricks-and-mortar retail? Absolutely. Compared with any other industrialized nation, we have five times the retail. But there has been no new supply over the past 10 years as a percent of the retail stock, and estimates call for a 25% reduction in retail stock, primarily related to conversions to mixed-use, apartments, medical offices, or industrial over the next five years.

Whereas retail had been strongly focused on location, we now know that those with an omnichannel focus have a much stickier consumer base. I always look at Target’s earnings as a bellwether. They have a great omnichannel interface and infrastructure and sell multiple goods—food, apparel, books. You can do same-day store pickup, delivery, or curbside. The interface is easy to use. You are seeing investors dip their toes back into retail. The fourth quarter was the first where net new-store openings were higher than net closings, and leasing has started to pick up, driven by certain retailers.

Are you doing anything differently as rates rise?

The biggest area strategically is how you finance things. We are moving from floating-rate to fixed-rate structures to hedge some of that risk. We are also evaluating opportunities to increase leverage, and locking in fixed rate long-term debt given rates have been at historical lows.

So, the mall isn’t dead?

Those that have good tenancy and aren’t overwhelmingly large [are more likely to survive]. I feel very strongly about outdoor malls/lifestyles centers. Enclosed, more tourist-driven malls, like in Hawaii, Las Vegas, or Orlando will continue to do quite well. Large-format and enclosed retail will be challenging.

What is the future of real estate?

We own some amazing life-sciences [properties] that are like little cities. There’s one in San Diego that has soccer fields, beer gardens, and places you want to go work. Even in our headquarters in New York, there is an amazing gym, meditation rooms, Thera guns, a bar/cafe and beekeepers on the roof in efforts for sustainability of honeybee population.

Thanks, Carly.

Write to Reshma Kapadia at [email protected]