Not all parts of the real estate market are winners all the time.
Leadership in this sector can ebb and flow as market forces impact residential and commercial real estate differently. If 2020 was a banner year for housing, 2021 is shaping up to be a great year for commercial real estate.
So far this year, we’ve witnessed a change in market leadership, with commercial real estate taking the lead in this segment. Remember that in 2020—and through the early days of 2021—it was housing that dominated performance and asset flows. That opportunity set was shaped by a global pandemic, as quarantines and work-from-home mandates put demand for homes at center stage.
Housing ETFs rallied to record highs in the past 12 months or so, as inventories dwindled in the face of ever-growing homebuyer appetite and mortgage rates at multidecade lows. New home construction soared, and building supplies such as lumber tripled in price.
The iShares U.S. Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB)—funds offering access to home builders and furnishing retailers—have had stellar runs, delivering almost twice the gains of the S&P 500 during that 12-month window.
Turn Of The Real Estate Worm
But year-to-date, and in the past month especially, momentum has shifted in the real estate opportunity set. Housing ETFs are cooling down while commercial real estate is having a moment.
Funds such as the $42 billion Vanguard Real Estate ETF (VNQ) and the $6 billion iShares U.S. Real Estate ETF (IYR)—examples of popular portfolios loaded with commercial REITs—have been steadily climbing higher since early May, and picking up assets as they rise, whereas housing ETFs have struggled to find new highs.
Charts courtesy of StockCharts.com
Work-From-Home Impact Fades
As helpful as the pandemic was to the housing market, it decimated the commercial real estate market as office buildings shuttered and storefronts closed.
REIT ETFs, which are heavily focused on commercial REITs, delivered roughly half the returns of housing ETFs in the past year. Now, as more and more companies begin to welcome employees back to the office, and shops and restaurants welcome back their patrons, commercial real estate is seeing a revival—albeit slowly. Weakness in interest rates as the market buys into the Federal Reserve’s argument that inflation fears are overblown is another factor helping support REIT values.
VNQ and IYR, for example, are outpacing the SPDR S&P 500 ETF Trust (SPY) by about 10 percentage points so far in 2021—25% versus 14% in returns.
Here Come The Assets
Investors have embraced this opportunity. VNQ has now picked up more than $3.5 billion in fresh net assets in 2021, while IYR, which had been bleeding assets this year, has seen its AUM jump more than 30% in the past week alone, following some $1 billion in inflows.
These two REIT ETFs offer access to the commercial real estate story. They each have only a 13% allocation to residential REITs, making commercial real estate a key driver of performance in these portfolios. Other commercial REIT-heavy ETFs such as XLRE have also been finding traction. These asset inflows have come as housing ETFs faced net redemptions in the past week.
To the extent that commercial REITs are seen as part of an economy-reopening trade, momentum can quickly change. We know that market narratives certainly do change on a dime.
But for ETF investors, the fact remains that the real estate investment opportunity isn’t monolithic, and the ETF market offers plenty of tools to access exactly the segment you want whenever you want it.
Contact Cinthia Murphy at [email protected]