Deidre Woollard: All right Fools. It's just a little bit past two o'clock here on the East Coast. This is our Millionacres Hour, where we talk about all things real estate. This week we're going to talk a little bit about volatility and how real estate compares to the stock market in some ways, and how it can help you balance out some of those nerves that you might be having in recent weeks. I'm here with Matt Argersinger, so please, hello.
Matt Argersinger: Let's get going Deidre. I'll share the screen here because we got a few slides to share as usual. There is our typical Millionacres logo here and you can see, follow Deidre or me on Twitter. As I like to say, Deidre is so much more entertaining follow [laughs] on Twitter and elsewhere. Well, before we get into the volatility, you and I always like to see where the market is these days. We've only got a couple of about a day or so left in the first quarter here. It's actually been a pretty good first quarter for real estate and for the market in general, you can see the S&P 500 is up six percent. Definitely nice gain for three months. Although, of course, as always, just feels like there's been a ton in between that. I was just thinking and I was writing an article earlier today and I was reflecting on, we had the capital riots. [laughs] We had the Texas winter storm, Deidre if you remember that. We had the Reddit, GameStop craze, and then we also just had the Suez Canal, which was blocked for almost a week. Think about all the things that have happened .
Weather has been all over the place and here we are, S&P 500 is up six percent, like nothing happened, it's been great. Interesting though, Nasdaq 100, I like to point to this one because it's been such a champion of the stock market for this whole bull market really going back more than 10 years. But that's seen a lot more volatility as it usually does and interesting to see that that's barely changed so far this year, just up a little bit. But here we go with real estate. Think of real estate ETF, that's the VNQ ETF that I always look at for benchmark where the real estate market is, that's enjoying a really nice start to the year of more than nine percent. Humble bragging, of course, always allowed here, I like to include where some of our premium Millionacres services are doing. Our average real estate winners recommendations up 8.7% so far this year, trailing the VNQ. I'm not happy about that, but it's definitely ahead of the market. Then our average Mogul recommendation, which also does REITs and equity recommendations in addition to private real estate deal recommendations is up even better. So far good year to real estate. Is it playing out the way you'd expected the year to go so far, Deidre?
Deidre Woollard: I think it's playing out a little more optimistically than I had thought in terms of re-openings and things like that. Seeing conference is being booked, we talked before about Comic-Con that's now happening around Thanksgiving.
Matt Argersinger: Yes
Deidre Woollard: I'm actually pleasantly surprised by how fast things are rolling out.
Matt Argersinger: Yeah, and that's good, it going hand-in-hand with the vaccines. You mentioned Comic-Con, yeah. There was actually a rumor a few weeks ago that they're actually going to have the Comic-Con on-time in July in San Diego, reduced numbers and all that, but they've probably wisely decided to push that off several more months, so it's not going to be happening in Thanksgiving. Which is actually causing a lot of sugaring among typical Comic-Con attendees for a lot of reasons.
Deidre Woollard: Yeah.
Matt Argersinger: But maybe not a great time of year. Anyway, we won't the take a rest there. Let's talk a little bit about volatility. I'm glad we're on this subject because it is something that certainly lately in the stock market we've experienced. 2020 was one of the most volatile years in the stock market down and up that we've ever seen. But Deidre, we tend to think about real estate as a little more of a safe haven. It's certainly wasn't the case last year, but over time, it's certainly is that asset class that we at least looked at to experience less volatility over time.
Deidre Woollard: Absolutely. Just a little bit about volatility is, I think long-term investors are perhaps better equipped to deal with it. As you age, you've been through a few market cycles. I remember the first time the market really dropped it. I was panicked, I was like "Oh my God, I'm going to lose everything." But once you've been through a few cycles, you get a little used to things and you know, especially for when you look at the research, that over time your money will come back, it will increase. But volatility makes people nervous. The press covers it incessantly when it starts to happen. You see all those like Getty Images of the traders with their head in their hands.
Matt Argersinger: They look stressed, their red sweat beads coming down, yeah totally. No, I love your point because the more you experience volatility, the longer you're an investor. Hopefully you get a little more steeled through a lot of these events that happen in the market from time-to-time and you maybe think of an old David Gardner adage which is the stock market falls faster on the way down, but it always rises more over time. It rises slower over time. But we feel that downside volatility so much more, and I think the biggest problem with volatility is not so much that it happens. We know that volatility happens.
Deidre Woollard: Right.
Matt Argersinger: The stock market's been volatile throughout history. It's how people react to it. What is the emotional fortitude? Because if you look at our second bullet point here, what happens to a lot of people, especially those who haven't really been investing for a long time. They see it, the stock market down 15, 20 percent. They see maybe some of their stock holdings down 30, 40, even 50 percent, and it's a really uncomfortable feeling to be losing money that you've worked hard for, and that you're investing, and saving for the future. So a lot of people will panic and often push the sell button just because they can't stand losing anymore and they're just worried, and as you mentioned, the headlines are bad. The media's covering it. We're probably covering it a little bit in the Motley Fool and Millionacres, what can we say when things are volatile? It gets to a lot of people. That's, of course, what we try to preach here in Millionacres, and the Motley Fool, is just, if you're an investor, you're by definition a long-term investor and you understand that the stock market day-to-day, month-to-month, year-to-year, even it's not usually a good indication of a company's value. That's determined over time. As long as you've invested in the right companies, who cares if the market's still a volatile. Pointing to another bullet here, volatility can indicate an overall market instability. You're right, but not always, because sometimes things happen in the market. This past week, there was a deleveraging or liquidation of a massive institutional fund that happens to own a lot of big stocks in the US, Europe, and China. Just by that fund liquidating, you saw a company like ViacomCBS, which is a blue-chip media company, market cap over 100 billion, it got cut in half. Now, do we think CBS's business certainly is worth half today as it was a few weeks ago? Probably not. But the stock market made it so because this fund happened to be liquidating their holdings and was forced to that because of margin calls and delivering. There's just a lot of things that can happen in the market that don't necessarily indicate any fundamental problems or an overall instability with the system, it's just things happen. Institutions moving in and out of stocks, or a hedge fund blows up, [laughs] which they seem to blow up all the time [laughs]. Saying all this though, a volatility doesn't really matter if it doesn't really equal risk. Should it even matter to the long-term investor? I think that's an interesting question to ask investors. I like what we have on this next slide which is, which would you rather have? Would you rather have an investment that returns nine percent a year with a five percent standard deviation? In other words, it swings five percent around it's mean. Or would you want one that returns 11 percent a year, which is a lot better, especially over time, but that can swing wildly with a 25 percent standard deviation? Now investment B is probably more typical of your average stock. Your average stock price goes up about 11 percent per year over time, but it can swing pretty wildly, oftentimes 20 percent or more in any given year. What do you think Deidre? Which one are you leaning towards?
Deidre Woollard: I say why choose? [laughs] Have both. [laughs]
Matt Argersinger: Of course, you can have both. Let's pretend you're in a world and this is all you got. For the next 10 years, you'd have to choose investment A or you choose investment B. Which one do you think? No right or wrong answers.
Deidre Woollard: In my life I've tended to go with B but the older I get, the more I like A, because I get that we all get a little more nervous I think maybe as we age.
Matt Argersinger: Close to retirement, I get it. What's fascinating is this, I think a lot of investors would think, "Well, if I don't care about volatility, I don't care what the standard deviation is doing. Let me just choose 11 percent per year." But what you'll find is that, we can talk about that some other time, but in a normal distribution, this is what happens actually. Investment A, because of that lower standard deviation actually compounds at a one percentage point per year greater rate than investment B, purely because of the volatility is much lower. If you think about it, what's happening to investment B in a normal distribution is that there's years where it's down 15 percent, there's years where it's up 30 percent. But because that's happening, if you think about it, the stock drops 10 percent. Well it doesn't have to go up 10 percent, it's got to go up more than 10 percent. That has an effect, and so we end up with a geometric mean, a geometric return, that's a lot different. It turns out, believe it or not, investment A with a lower returning per year but lower volatility, is actually the better investment. So if you mess it 100 percent, compounding at 8.875 percent, that's what you end up with in 25 years, rather than investing 100,000 in B, you end up with a pretty good return but not nearly as good as investment A. This is just a mathematical way of looking at how volatility can have an impact on a portfolio's returns. It's wise, if you think, to not totally ignore volatility. Generally, we're looking for the highest returning investment, again especially if you are a long-term investor and you can live with the swings, ebbs, and flows of the stock market. But volatility is not meaningless. It certainly has an effect on your returns. Here we go. Deidre, this is our favorite topic of course, real estate. [laughs] and so why are we talking about real estate today? Well, because real estate is an asset class that over time has been less volatile than the average stock. If you look at the average REIT, real estate investment trust, or even just your real estate companies that might not be REITs, their volatility over time is not nearly as high as the average stock. If we step outside the stock market, it gets even better if you look at, for example, the NCREIF index. It's an index of commercial properties but it's been tracked for decades, very uncorrelated with the stock and bond markets, very low volatility. It has about a third of the volatility of the stock market. Real estate in general, it has a class we think, because not only does it generate great returns, but it also comes with much lower volatility. One other thing too, as we talk about REITs and real estate in general is that, because real estate management companies, what essentially dealing with are long-term leases, 5, 10, 15-year leases, even at the multi-family level. Let's say you've got high occupancy apartment building. If you got tenants who might be on six months to one-year leases, or even month-to-month leases, but it's all very staggered. So you have a very predictable view of your cash flows year-to-year. That way, not only does it make the business stable, it also let's REITs and real estate company provide steady and consistent dividends and distributions. It's an asset class with a lot of advantages. For example, talk about the tax advantages but real estate also has many tax advantages versus other asset classes. So all these things really lead to an asset class that by large, much more stable, much more consistent, less volatile over time.
Deidre Woollard: Absolutely. I think that some people right now are looking at REITs in the moment, or comparing it to last year. It's such an anomalous year. It's got nothing to do with the long-term history of REITs. If you look at REITs over time, it's just so clear. We've got some great research on Millionacres about this that I can throw in the chat as well. Because real estate just holds its value over time and steadily increases.
Matt Argersinger: Another thing about real estate too, just getting on the taxes, that real estate's often held by people for a long time, obviously, because it's illiquid. That's often viewed as a negative for real estate illiquid. But because it's that way, it's not as if I own a commercial building or if I own a rental property I'm checking the value of that thing every day. Now I might get the Case-Shiller Index comes out or I get my Zestimate on Zillow [laughs] and I'm thinking, "That's interesting." But I'm not checking the stock market on a day-to-day or week-to-week basis. Even if my property appreciates and I'm excited about that, it's not like I can go out tomorrow and sell it. [laughs] That equity.
Deidre Woollard: Well, in this market you probably could. [laughs]
Matt Argersinger: Well, that's true. I mean this is an unusual. Everyone's buying houses these days, and of course with the rise of eye buying, man. There is a lot more "liquidity" in the housing market. But it's still that asset class where people are forced into holding it for long periods of time. In a way that indirectly causes it to be more stable, because real estate is just not transacted as often as a given stock which is traded every second, even every microsecond, every day in the stock market when it's open. One of the things that's obviously been a hot topic, Deidre lately is interest rates. We've seen the yields on the treasury bonds rise. That's interesting only because it's juxtaposed with the fed saying, "Hey, we're not raising rates. Our intention is to keep rates low for the next couple of years." But you've had the situation where if you look at the 10-year bond, it's up quite a bit over the last several months. Not quite back to where it was before COVID and all that, but it's risen pretty dramatically from where it was, say, last summer. That's caused a little consternation in the stock market.
Deidre Woollard: Absolutely, and there's a lot of discussion lately about inflation. One of the things that Janet Yellen in as treasury secretary, there's a lot of discussion on how much of a cap they're going to put on inflation, if they're going to let inflation grow a little bit to stimulate the economy. There's all sorts of discussion about that.
Matt Argersinger: Yeah. Inflation is one of those interesting topics when it comes to real estate. Real estate is a fairly good inflation hedge, at least it has been over time. For the simple fact that the cost of building a house or a building rises over time. The labor to construct a building or a house over time has gone up and so in a way, all else equal, real estate tends to rise with inflation. By and large, you should expect any property owned to rise by the amount of inflation as the replacement cost of that asset goes up over time. But as we point out here, it's not always great. Imagine a moment you're hospitality REIT and you're trying to raise your daily prices for your rooms. Yeah, you can react to that, but man, maybe my food costs, my service costs, all that stuff are growing up way faster and I can't raise my hotel prices fast enough to match demand in the market, therefore I tend to lose because I'm more of an operating real estate business than, say, an office REIT. But then if you do look at REITs general, a lot of REITs buildings are on long-term leases. Imagine I have a tenant who is on a five-year lease, I've got an escalator in there that raises the rent 2-3 percent per year. Maybe that doesn't keep up with inflation, and all of a sudden my rental income is steady and growing, but it's not nearly keeping up with my costs in the market. So I think for all asset classes, real estate included, if inflation rises too fast and too high, of course, it's going to damage real estate just like most other asset classes.
Deidre Woollard: Yeah. Absolutely and I think that's one of the reasons that we're going to see a lot of attention on that, because that's something that the fed is watching too. They don't want inflation to get out of control, but they also need a certain amount of it. It's been at really low rates for a long period of time and some people have said that that contributed to that really slow recovery over the last decade or so.
Matt Argersinger: It's possible because if you look at wages, wages have felt like they've stagnated, so incomes have stagnated. There's been tremendous deflationary pressures in other parts of the market, whether you talked about technology goods or apparel and things like that. That's hurt profit margins in a lot of cases. A little inflation is probably good. What does a little inflation do also by the way? It makes your debt service costs relatively cheaper over time too, because most of your debt is going to be fixed. If you have interest payments and principal payments, little inflation, I'm getting more income elsewhere, the relative size of my debt is declining. That's also one of the reasons that fed likes when there's a little inflation in the market helps the government and helps essentially debt lending businesses out there as well. Now you had this [inaudible 00:19:26] , which I think is interesting. So residential real estate prices. I mean, we saw another report today.
Deidre Woollard: Case-Shiller was out today.
Matt Argersinger: Year-over-year prices up, was it 12 percent? It was 11 percent, it was lowest double-digits. That's extraordinary and a lot of people, I think, rightfully are saying, "Is the housing market in a bubble?" But you don't necessarily think that's the case.
Deidre Woollard: I don't. It's the supply is so low. There are now more agents than there are houses for sale. [laughs] That's just a crazy statistic, the amount of inventory, and it's not just in traditionally hot markets, it's everywhere, and it's really just doing some crazy things to the market. It's starting, I believe, to affect the sales numbers, but we'll have to see what the next month shows because we're getting right into that a heart of selling season.
Matt Argersinger: That's the thing, the inventory. No one's leasing their house for sale. No one's really moving. I'm looking at reports from developers all the time. They're homebuilders. They're building as fast as they can, but even they can't keep up with the demand. By the way, they're seeing a lot of higher lumber, copper, construction costs that go into their business. A lot of times they're holding back as well thinking it's not profitable enough for me to build new houses right now. It's just weird market that we're in, where existing homes, they just keep getting priced higher just because there's so few of them. The amount of time there on the market keep shrinking. Can you really call the housing market in a bubble? I don't think so. There's just so many different factors today versus say, back in the mid 2000s. By the way, if you've tried to buy a house or refinancing a house lately, I refinanced a house recently, and my goodness, the underwriting standards of today are much more stringent than they were in the previous two decades ago now. It's not as easy for people to buy homes these days, or at least buy homes to the value that they think they can get. Because the underwriting standards for lenders have gotten so strict. Gosh, there's demand out there, but there's no one really selling, and the people who are able to buy, not only do they have a lower selection of homes to choose from, and so they're buying or getting into bidding wars. But it's really costly and expensive to get to try to buy a house right now too, despite historically low-interest rates. [laughs]
Deidre Woollard: That's true because I think that before the pandemic, we saw a little bit of that loosening of underwriting. But then post-pandemic, it tightened right back up again. Banks are starting to get nervous. The other factor too, is I feel like we're almost at the end of the refi boom. It seems like looking at the numbers from the Mortgage Bankers Association each week. They're still big, but they're not as massive as they were. I feel like we're getting closer to the end of everybody who got in and refied while the rates were low, it may be over for now, to some extent.
Matt Argersinger: Yeah. I want to see how that plays out, especially if rates don't go back down again. Then you'd have to believe that the refi market is pretty much plateaued. Last bullet here. People are seeking alternative stocks, but where are they going? You mentioned they're going to Bitcoin. [laughs]
Deidre Woollard: Yes.
Matt Argersinger: A new cult, instead of other places.
Deidre Woollard: Well now, Bitcoin is looking stable compared to NFTs, [laughs] which really makes me nervous. I think that the fact that Bitcoin is being gradually more accepted, more places, things like PayPal and Square using Bitcoin, is giving it a little bit of legitimacy that may or may not be earned in terms of its actual stability long-term, and that's the thing that worries me. Gold is actually down this year. Last I heard by nine percent, partly because you don't hear about the gold bugs as much as you used to.
Matt Argersinger: True. For thousands of years, gold is the ultimate store value. Now in 2021, it's no, forget gold. [laughs] We got newer things, we got Bitcoin and digital unique assets that I don't quite understand that people are paying millions of dollars for. I love these tables and now REIT puts out quite a bit going on here. But Deidre, you want to walk us through this a little bit, this table?
Deidre Woollard: Well, the reason I like this table is that it really shows that what we were seeing with in terms of volatility in the past year and how it for coming, kind of coming out of it now. Because if you look at those, you've got the red things on the side and black things in the middle. Well, the black things in the middle, [laughs] it's us bouncing back. When we're in the red is the effect of the pandemic over time. But even if it's that, I always like to look amidst that, see a red, those little black lines there, what did well? Industrial, single-family homes, self-storage, which we talk about a lot. These are the things that are less volatile in general, and that's one of the things, as we look at retail, less volatile in general, but within REITs too, there are some REITs that are less volatile than others based on a variety of factors. You mentioned lease term, but that's part of it. Also, just demand over time and those demographic and economic tailwinds.
Matt Argersinger: Yeah, absolutely. They're all in here. I love how Nareit set this up because right here, you have the crash, the pandemic peak, so to speak, of the volatility in stock market from last February to mid or late March. This is just the absolute devastation you saw. Retail got obviously pummeled. Look at malls, down 62 percent.
Deidre Woollard: Yeah.
Matt Argersinger: Commercial financing, home financing really crushed. Then these shows the bounce back, the huge rally we saw from the end of March to the fall. Then this is your recent performance, this column. Then the final column is the whole gamut, basically, the year from February to February. As devastating and crazy as this was, year-over-year granted, it's still a very bad year for real estate, historically bad. But gosh, these returns are a lot more, I don't know, [laughs] digestible? I don't know what the right word would be, but just survivable. Like if you said, "Real estate is it's going to have a bad year." These are the returns, you'd be like, "I can take that, I'll look for some bargains. That's not going to cause me to fall out of my chair." But look what you had to go through. [laughs] You had to go through this.
Deidre Woollard: Right, but it's a proof of the volatility thing that we were talking about. If you were a REIT holder in one of these sectors and you panicked during that peak moment.
Matt Argersinger: If you saw the March 23rd. Sorry. [laughs]
Deidre Woollard: Yeah, but if you hold on, things are starting to get better and in many of those cases we're going to expect to see them continue to get better. It really is that example of when you're at that low, it's almost like you have to lock your stocks away from yourself. Like, just don't do it.
Matt Argersinger: Yeah. Don't look. [laughs]
Deidre Woollard: It's so tempting. Don't look, don't get in there. Unless you're trying to buy something and even then, you want to be careful about what you're buying. But I think there are a lot of us at the Fool who certainly when we see prices start looking at our watchlist and go, "Well, maybe." [laughs]
Matt Argersinger: Yeah, exactly. If you were buying in late March last year, you're feeling pretty good. I was doing some buying a lot, a lot of people were doing buying, thankfully, we recommended some REITs and equities in our Mogul service around that time, which have all done extraordinarily well, and that was because looking at things you just saw in a lot of cases that a lot of valuations were just so beaten down trading well below net asset value. If you thought there was any future of it to the US [laughs] in the economy. In the next several years, you could have made some fantastic investments. You pointed out some of the ones where there's a lot more stability, industrial you mentioned. As terrible as 2020 was, and the whole pandemic year was, it ended up higher than where it began, obvious reasons. E-commerce, the rise in the need and the demand for warehouse and distribution logistics, we talked a lot about that. If you told me that we were going to pull five years of e-commerce together, accelerate that forward in one year which we did in 2020, I think this number should actually be a lot higher. I think even though industrial is one of the few on here that has enjoyed a positive return, it's one of those still I view as actually really undervalued given what we know is the reality of the demand for e-commerce and going forward. Then, yeah, single family homes, positive. Again, such a huge demand for these. They're just not enough. We're just not building enough. Then self storage, always a very much more stable asset class within real estate, it's got a lot of advantages. If there's a panic in the streets, it's not like suddenly everyone is going to clear out their self storage and stop [laughs] paying their $70 a month to keep all their stuff because they'll lose all their stuff. So it's a very good business model in a lot of cases. What the heck has happened to timber? That's insane. [laughs] I don't understand commodities as well as a lot of other people, so that's just amazing to me. Ninety-one percent off the bottom in timber REITs and wow, amazing. Anyway, a really cool look, I'm glad you brought this table in for today's slides because it is the year that was in the pandemic and we're coming out of it, and gosh, look at this. I know it's been a pretty good market over the past month as well, but gosh, there's probably still some good bargains out there. Like I said, even though industrial we're seeing a positive return there, I think there's still plenty of bargains in that space. As you know, as I've talked to you for years about. [laughs] Here we go, let's look at this, Chart 1: Pandemic-Era Returns. This is just another linear measure of it. Look at that, my God. Look at this. That's a veil black diamond right there. That's what they call it, Devils cross, when you're at a sea resort or something like that or Satan's satanic hill. You went down there, but then the bounce back. It's been very, very choppy, but here we are looking pretty good here, or at least say two-thirds or three-quarters of the way back as of last month in terms of the market.
Deidre Woollard: I think we're going to continue to see REITs just stabilize a bit more. It was such a weird year for real estate. This isn't the sort of thing that happens because this was mostly due to closures. We never have the same thing twice. But even if we do have another pandemic and another series of closures, we're not going to see this type of situation happen the same way because it won't be as much of a shock, it will be a very different situation. I feel like this really shows that we made it out of it. Sometimes I just want to pat us all on the back. [laughs] We're making it through. It's been a really challenging time.
Matt Argersinger: Absolutely. Real estate, if you think about it, it's unbelievable. In the last 15 years, real estate has had two incredible volatility events, really depression-like events. With the global financial crisis and what that had for real estate, just the commercial financing and everything that happened around that and then, of course, last year and still going on, which is the pandemic, which had a very acute effect on real estate as the asset class in particular. It's incredible, and yet, here we are. I talked to people back in the financial crisis and back then they were saying, "Oh, well, real estate's changed forever. You're never going to see cap rates go down again, you're never going to see people pay this square foot for apartments again or our hospitality again," and guess what? A few years after the financial crisis, everything was at record highs again. Probably due to low-interest rates, which had been very accommodative throughout the time, but everything in the moment looks really awful, and everything in the moment a year ago looked awful. I think you had a lot of people who were just like this, it's going to change things forever. There will be some things of change. But as we've talked about, I think by the second half of this year, hopefully, I think things are going to be back to a much more normal than people might expect. The funny thing is, the surprise is going to probably be on how normal things might be in six months versus what we think about today. Which is like, things are getting back, but gosh, it's hard to imagine them getting back to normal. We talked a little while ago, but just the amount of people flying again, which is extraordinary. As soon as these events come back like Comic-Con or other events and these big conferences, people are going to go back and resorts are going to get fully back opened and people are going to go back to concerts. The new normal might just be the surprise. It might be surprising how normal things are in just some time from now.
Deidre Woollard: This slide I wanted to bring up, we've got a comment that fits perfectly. Max says, "What do you think about people investing in real estate, given that if you own a home, most of your network is already in real estate." You shared this on Twitter the other day, and I'm like, this is such a great illustration of the value of real estate.
Matt Argersinger: Visual Capitalist put this together a couple of years back and I like it. To Max's point, if you own a home and you're thinking to yourself real estate, well, there you go. Seventy percent of my assets might be in my home, and so that is my real estate investment. So I'm invested in real estate. I tend to push back on that. I tend to think your principle residence doesn't usually equal real estate investing. To me, real estate investing is investing in REITs or maybe private real estate equities or investing in a rental property, investing in commercial properties. Where you're looking at a risk asset and you're looking to make decisions for that asset for profit, a profit motive. We don't really do that with our homes. We look our homes and think, okay, well, this is a great place to live, my kids can grow up and have access to nice schools or playgrounds. I'm often making decisions about my principal residence that I wouldn't make about a rental property or a commercial property I'm invested in. What's fascinating about this chart is what are people's journeys? Most of my assets, if I'm in the middle-income net-worth area, 62 percent on average is in my principle residence. But that declines dramatically as you scale up in your net worth to the point where when you're in the ultra rich category, which hopefully all of us can get to someday, but the top one percent, the primary residence is less than 10 percent of the the assets, actually the plurality of assets, almost 50 percent is in business equity and other real estate. Real estate investments, those could be vacation homes, they could be commercial properties that you own or equity in office buildings or limited partnerships that invest in real estate, things like that, or private equity. Again, what's also fascinating maybe to a lot of viewers too is that the proportion of the stocks, liquid security, is actually lower than you might think for the ultra rich. We tend to think, well, stock market, that's how people get rich and the rich people must own billions dollars worth of stocks. Well, they do, but as a proportion of their net worth. It's actually less than it is for other real estate and private equity, which I think is quite fascinating about this.
Deidre Woollard: I think part of that too, I know we're not going to talk taxes this time, but I think part of the reason that you see that with the ultra rich is that they are more tax sensitive than any other humans I think. [laughs] I feel like that's a part of it too, is that's one reason that you see them looking at real estate as a way to build wealth and maintain it.
Matt Argersinger: Save on those taxes.
Deidre Woollard: Exactly.
Matt Argersinger: One of the parts of the real estate market that I should be focused on if I'm thinking diversifying my portfolio, but I'm looking to do that maybe in places that aren't going to experience a lot of volatility, Deidre. These are three areas that you highlighted for investors.
Deidre Woollard: These are three areas that we saw do well during the pandemic. We've already talked about industrial, the need for space, a billion square feet by 2025.
Matt Argersinger: That's huge.
Deidre Woollard: There's another number that I think we've quoted before, which is four million square feet for returns alone.
Matt Argersinger: Four hundred million square feet of warehouse just to handle returns since so many people are buying or shopping online, there's not enough warehouse space to handle returns, which is an incredible figure.
Deidre Woollard: I read an article in business the other day, they're turning golf courses into Amazon fulfillment centers in some areas.
Matt Argersinger: My gosh.
Deidre Woollard: The need for space is just out of control. Price per square foot in industrial traditionally didn't move too much. I believe it was up about four percent last year, which for industrial is really big from what I've seen in the past.
Matt Argersinger: Big time and in my view, in a lot of markets that should be growing a lot higher because above the space that you need to build an effective warehouse or distribution facility, it's not a half acre where I can put an office building and with a small parking lot. No, I need tens of thousands of square feet of space to build any kind of warehouse that's going to serve, say a FedEx or an Amazon or an XPO, or any big companies that need logistics. These are huge facilities, with thousands of square feet. Trying to buy that amount of land or that amount of development space in tight markets like think about trying to do that in Boston or New York City, nowadays even Austin, Texas. It's really expensive to do that. I got to believe just to justify the development is going to go in, you're going to have to see that rent per square foot per industrial [inaudible 00:39:02] a lot higher.
Deidre Woollard: Absolutely. The next section, communications and data centers, we all use a lot more data during the pandemic, everybody's Zooming from home, 5G. Then also the government now really wants to roll-out broadband. The Biden administration has talked about that, that's a priority. They see that as really important in rural areas and places where they aren't. We saw it this year one of the concerns is education. Kids that couldn't go to school and then didn't have access to the Internet are completely cut off. We're seeing just that need and that is driving a lot more interest in both data centers and communication towers.
Matt Argersinger: Right. Into the second bullet there where some companies go in-house.
Deidre Woollard: Perfect Google deal.
Matt Argersinger: Well there's that and then you look at the telecom, lots of telecom spent the last decade divesting their towers. Now they're like, we need to get those back. [laughs] They're much more valuable than we thought and we want to control them. That's something you could see as well. The towers did really well acquiring those assets for now. Now it looks like great prices has many years ago, and now the equipment that's needed, the 5G rollout, it's just like it's now very expensive now for a lot of these telecom companies to lease these properties, especially some of the small cell stuff like Crown Castle in the urban zones. It's not cheap. You could see a lot of telecom companies pulling those back in as well. But certainly on the data center side as well, what is more cost-effective outsourcing that, leasing it, or doing it in-house? For a long time especially like SirPost.com is like do it in-house. Then for the last 10 or 15 years, it was like no, let's lease all that stuff it's a lot cheaper. What's essentially effectively make the Cloud and now it's, no put it all back in. [laughs]
Deidre Woollard: I think we're reaching a little bit of a hybrid. If I look at what Amazon is doing, even Google with that seven billion dollar, Google still has plenty of data in data centers with other companies all around. I think that's what you see now is these big companies, they're being like, "Okay, we're going to own some, we're going to lease some space, we're going to divide it up a little bit."
Matt Argersinger: Yeah, exactly. Of course there's always ways to do it, and the good companies and allocate capital well, we'll figure out the right way to use or divest the assets. Finally, multi-family, what we're looking at here?
Deidre Woollard: What aren't we looking at? [laughs] We've got growing population, we've got housing prices that are insane, a lot of people just cannot get into the market. Single-family homes are higher-priced, usually think condos, but even condos are going up to the point where a lot of people can't get in. Increased need for multifamily. I think we're going to see a lot of household formation. Everybody that maybe moved back home, or moved in, we're going to see that household formation come back as the job market improves over the next year or two. I'm also looking at single-family build to rent. We start seeing some of the home-builders do it in big communities. DR Horton has sold the community. Lennar is doing that spin-off for single-family rentals. I'm looking at that and I'm also looking at mobile homes a lot. I've started, Blackstone I know is investing a lot in mobile homes. I've interviewed a few people on the Millionacres podcasts, and there's a lot of interest starting to grow about mobile home communities, which is really interesting because I think there's certainly some ethical concerns, but there's also a need for housing to be fast, and it does solve some of those issues.
Matt Argersinger: Yeah, the last slide we have, I'm glad you brought up the mobile home RV community, that's interesting. There is a way you can invest in that pretty effectively, and we will talk about that in a sec. That bullet about the single-family rentals. Last summer in our Mogul service, we invested in a private deal that was going to develop multiple stages, but it's ultimately going to develop 300 single-family rental houses right outside Huntsville, Alabama, which by the way is a pretty hot market for a lot of reasons. But you're seeing this more and more. The demand is there and if you think about where we are post pandemic, a lot of people can't afford to buy homes, especially in hot markets, but they can afford to rent. So if I can rent a single-family home, I'm not sharing a wall or floors with anyone and maybe I have a little yard, that can be a lot, that can be pretty appealing. Maybe I'm raising a family, so I need a little more space. That's not something that's existed for a long time. You either had your single-family home purchase market or you had your apartment communities or your garden style apartments and things like that. The SFR trend is a big one. I think that's really taking off in a lot of places. I'm not surprised that Blackstone and others are getting into it because there's certainly demand and it's in a lot of way is a lot cheaper and faster than building your typical high-rise apartment building or other complex. Now, so we talked about some of the good places in the market. Let's talk about some of the more volatile parts of the market and probably no surprises here, right, Deidre?
Deidre Woollard: Hotel REITs, it's not a surprise. We saw the numbers last year, the revenue per available room numbers, the occupancy rates all just down to historic lows. But for now looking forward, the CMBS, commercial mortgage-backed security debt is a concern in the hospitality market. We've talked about that before, it's still really high. Thing is there's a lot of dry powder on the sidelines right now distressed asset funds looking to pounds on that. We've seen a couple of deals happen so far, but not a lot considering what could happen. It is a little risky there, but we're seeing some things come back. You and I have talked about Ryman Hospitality Group before and they are starting to see people booking conventions and things like that. I would say it's getting less risky, but it's still pretty risky. What do you think?
Matt Argersinger: Yeah, I think the future is getting a little less cloudy, and you're seeing a lot of institutional money come in and buy private equity and buy out a lot of assets thinking that there is a lot of stress here. I'm dealing in a situation where there's a lot of fore-sellers. I can go in and buy hopefully for cents on the dollar, and then maybe a year from now or two years from now the market's bounce back, average daily rates are back, occupancy is back, and I can release into the public markets or to other buyers at fairly healthy prices. Yeah, no doubt. There's going to be a lot of money made in the hotel space. My promise, for when it comes to REITs or when it comes to for the retail investor looking for opportunities, it's a little dicier. I tend to land on Ryman, like you said, or Vail Resorts, and Vail by the way, is not distressed at all. It's pretty much back at all-time highs, in fact a new all-time highs. But situations where there's just a naturally captive audience for your hotels, unique assets, a nice mix of corporate but also casual tourism and visitors. When you can do that, you can marry all that together, I think you can find some good opportunities buying your typical hospitality hotel rate right now. There's just a lot to slog through right here. Like I said, I think you can do better with some of the stronger parts of the market, even though they're up which is like industrial, on a risk-war basis, you can probably do a lot better.
Deidre Woollard: I think another factor is that we might see a little bit of, in terms of travel, a bump this year that may not last along partly because a lot of people are going to be vaccinated, a lot of people may be able to travel, but they're not going to travel internationally.
Matt Argersinger: That's true.
Deidre Woollard: Probably, not this year. You've got a bit of a US captive audience. You might see a bump, but that bump may not last long term.
Matt Argersinger: Yeah, that's an interesting point. We got retail. Gosh, even before COVID, we need this, Deidre. There was just trouble. I think it's fair to say the US is still over retailed, still too much square footage. Even before COVID, we were seeing the transformation of a lot of real estate into either mixed use, or data center, or warehouse space. I feel like all the pandemic did was accelerate a lot of that. So much is going online. Talk about murky, what is the future of traditional retail? I don't know if the clouds have dissipated so much there. I do think there are probably situations where your EPRs of the world or Saratoga's, even your Simon Property may be where you have an opportunity to build experiential or other reasons for tenants and customers to come to your property instead of just coming up to shop. That could be an opportunity, but still very cloudy to me.
Deidre Woollard: Experiential is really fascinating. For example, there was a story on Millionacres recently, Dick's Sporting Goods. They're putting in rock walls in some of their stores. They're betting on that return of experiential, which before the pandemic, all we heard about was experiential. Simon had that group with Allied to do e-sports. Everyone was going to come to the mall to do all these interesting things, and then pandemic hits and nobody could actually go to the mall.
Matt Argersinger: Those trends should be still intact. Now, it's just a matter of vaccination and people being able to get out there. Once that's placed, I think those things will do it. It's funny, you and I are both from Massachusetts. I'm trying to think, what is that furniture company up there in Massachusetts? Do you remember, the two brothers?
Deidre Woollard: Jordan's Furniture?
Matt Argersinger: Yes, Jordan's Furniture. I remember over the last 20 years, all the Jordan's Furniture outlets, which is a very popular furniture outlet store brand, they converted all their spaces into rock wall climbing, or trapeze, or they added IMAX theaters and restaurants like Fuddruckers. So you'd go, and I'm going there to hang out for the day because I can shop for furniture, I can shop for electronics, but my kid can go play on the trapeze or do other things. We can go see a movie later in the afternoon. We can go bowling. [laughs] It became these big events centers. I feel like that, that's still out there. It's just a matter of people being comfortable going out to those places again, and I think they will. Anyway, funny anecdote from back home.
Deidre Woollard: Probably too late for the American Dream mall though. I don't know if you've been to that, the whole triple five group. I believe part of the Mall of America is now going back to the bank because of all of that debt.
Matt Argersinger: Ouch.
Deidre Woollard: Might be a little late for that one.
Matt Argersinger: We'll talk about office quickly because I do want to get to the last slide. But wow, perfect way to put it. It's a wild card with office. I think it's just going to be different. All companies are going to do things differently, whether it's hybrid models, whether it's on and off days. It's going to be just fascinating. I think every company is going to make its own decision. I wouldn't read too much into this one survey that says 80 percent of workers want to go back to the office or another survey that says only 20 percent.
Deidre Woollard: So many surveys.
Matt Argersinger: Too many surveys. I'm always surveyed when it comes to office because honestly, it's market-specific. It's company-specific. It's all going to balance out at some point. I think you and I both agree, a certain percentage of workers are going to work from home a lot or even most of the time. That's just going to be the reality. Is the need for office space going to completely go away? I don't think so. It's going to be used differently maybe and maybe less in different frequency, but it's not going away. Let's go to this last slide here. Oh, sorry. Let's look this one real quick.
Deidre Woollard: We can go through this one quickly. This is just a little bit of thinking about the old standards in stocks like the bellwethers like a Prologis for industrial versus the upstarts, one that might be newer. Just some pros and cons to each. You're looking for that track record but with an upstart, there's more growth. As you think about volatility, you want to have that mix of bellwethers and upstarts, I think as you build a portfolio.
Matt Argersinger: Yes, exactly. When we talked about way at beginning in the first couple of slides, which is your bellwether is obviously going to be much less volatile, so your opportunity to build good geometric compounding returns over time with your portfolio, it's going to come from having a good stable base of bellwethers as you put it. Yeah, you want to have the upstarts though too because ultimately, returns matter the most. Volatility plays a role. You certainly want to try to swing for the fences with at least part of your portfolio because, my goodness, the difference it will make to your returns over time will be massive. Speaking of boring and bellwether, if you go to the last slide here, these are just a quick list. I know we don't have much time, of what I call low-vol ideas. They're all real estate companies. If you're interested in investments where there's really low volatility, forgetting for a fact that 2020 happened but just looking over, say, the last decade, these are companies that have demonstrated very little volatility. Their business models are also very, I hate to say it, but boring. Easterly Government Properties is probably the boringest of the boring here. It is exclusively focused on federally-leased properties. Think of an FBI building or a FEMA building or a veteran's affairs building, which is one of the big ones, that's their entire portfolio. They've got about 80 properties. They're all feds on long-term federal leases. The good thing about Uncle Sam, he never defaults yet. [laughs] Usually, always gets the rent paid in full and on time, backed by the full faith and credit of the US government as we like to say. Really boring rate, but a good track record. Since they went public, I believe it was six or seven years ago, it's generated about 11 percent annual return. Pretty good for about a boring as business, and stable as business you can find. Life Storage, we talked about self-stores. This is probably my favorite self-storage business. Self-storage is great business. One thing about self-storage is that you can pretty much break even with the self-storage facility at about 60 percent occupancy. No other real estate asset class can really say that. NVR, look at the long-term chart of NVR, very few ups and downs, but steady winner over time. The track record is amazing. PS Business Parks, company I've been looking at recently, they are mostly industrial/flex office, big flex office. Flex office tends to be very stable business in demand, in a lot of markets. Safehold, look at that name, ticker SAFE, that's the ticker. SAFE. How could you go wrong? How could it be volatile but safe? Their entire business ball is based on going to a commercial property owner, buying the land and leasing it back on a super long -term lease like 50-year lease, 99-year lease back to the property owner. The nice thing is the property owner gets a nice boatload of cash and in return, Safehold gets a nice 99-year lease on the land. Think about that. [laughs] You can't be anymore safer, and stable, and sleepier than that. Then STAG Industrial, I just put that up here because I like STAG Industrial, and even the names stag it stagnates over time. Low-volatile, right? Then Deidre, I'm so glad you mentioned RV homes, mobile home market earlier because Sun Communities, I believe, is the biggest owner of mobile home parks in the United States. This, again is a business where they understand the economics of that business really well. They dominate in all their markets. This is just a rising, especially people looking for more affordable housing options, and Sun Communities just carved out this really nice niche within the multi-family space. There you go, 1, 2, 3, 4, 5, 6, 7, really boring, low-volatile ideas. All these businesses have great track records depending on when you invested but for the most part, you've done really well by investing in a lot of these businesses. All right. I will stop sharing my screen. That was a lot of stuff we threw at people today, I'm sorry. [laughs] [inaudible 00:56:23] at the end of time. Wow.
Deidre Woollard: It was great. There's so many good ideas. Let's see anything with our last couple of minutes here. A question from Retired Fool, did dividend stocks minimize to get disadvantages of high-volatility?
Matt Argersinger: Did they minimize disadvantages? Yeah, I would say because for a business that's generally a dividend-payer, especially in the REIT space, you're taking a significant percentage of your net income or your pre-tax profits, and you're setting aside for your dividend. Most companies recognize that their shareholder base generally is investing in them for that dividend. Naturally, they're allocating capital to pay that dividend, right or wrong, but that tends to lend stability. You're looking at businesses with again, if your real estate business, long-term leases or stable cash flows, they have the ability to pay that dividend over time. That's somewhat things they focus on. It adds stability to the business.
Deidre Woollard: Excellent. Let's see, one question from Laurie. If communication towers will be important in the future, why has AMT done so poorly in the past couple of years?
Matt Argersinger: Well, there's a bunch of reasons for that. You can look at CCI as well. It's also underperformed. There's been a consolidation a little bit in the telecom space. You saw that with T-Mobile and Sprint, which was finally allowed to merge last year or earlier this year, I can't remember. It's been happening so long. I can't remember when they actually happened. What happens then is then you have a lot of telecom companies. You don't have to double up on towers anymore. They can consolidate their assets within towers. That's part of the reason. There's also the 5G rollout which a lot of people got excited about early on with these towers. If you look at the returns over the last decade, it has been phenomenon because people have been anticipating the next-gen rollout of new assets on these towers. It's coming, it's just not coming as fast. I think lot of these stocks, especially AMT, got way ahead of themselves probably. So they're just pulling back a little bit. But gosh, the long-term picture, in my view couldn't be brighter for these companies especially now with the telecom companies wishing they still had these assets, and now [laughs] trying to get them back.
Deidre Woollard: Exactly, perfect. Well, we are at time. Thank you so much, Matt. [MUSIC]