Animal Spirits Podcast: "Talk Your Book: State of The Real Estate Market" – Detailed Summary

Release Date: February 24, 2025
Host: The Compound (Michael Batnick and Ben Carlson)
Guests: Paul Biaki (Chief ETF Strategist) and Nick Tanora (Portfolio Manager and Chief Investment Officer at GSI Capital)

Overview

In the February 24, 2025 episode of the Animal Spirits Podcast, hosts Michael Batnick and Ben Carlson delve into the current state of the real estate market, focusing on Real Estate Investment Trusts (REITs). Joined by industry experts Paul Biaki and Nick Tanora, the discussion unpacks the challenges and opportunities within the REIT sector, the impact of rising interest rates, and the distinctions between active and passive investment strategies in real estate.

Impact of Rising Interest Rates on REITs

The conversation begins with an examination of how sustained high interest rates have adversely affected the real estate market, particularly REITs.

• Mike Batnick expresses surprise over the poor performance of REITs, noting, "REITs, as far as the financial media goes, do not get a lot of publicity. Is that fair?" (01:13).

• Paul Biaki confirms, highlighting that REITs have been the worst-performing sector over the past five years and attributes this to rising rates and their smaller market size compared to other sectors like utilities and materials (01:38).

• Ben Carlson adds that REITs have been repriced to align with the current 4.5% to 5% 10-year interest rate environment, making them more sensitive to interest rate fluctuations (03:24).

Perception and Performance of REITs

The discussion shifts to the broader perception of REITs as an asset class and their performance relative to the S&P 500.

• Nick Tanora explains that advisors often view REITs as an alternative income-producing asset within an income sleeve, rather than purely as a real estate sector component of the S&P 500 (08:34).

• Ben Carlson points out the historical underperformance of real estate within the S&P 500, noting it has been the worst-performing sector, up only 5% over the past five years compared to the S&P 500's 80% growth (10:17).

• Michael Batnick raises a critical point about the longevity and adaptability of REIT managers, questioning if the rapid rate hikes of the 2020s caught many off guard (21:25).

Active vs. Passive REIT Investment Strategies

A significant portion of the podcast explores the merits of active versus passive REIT investment strategies.

• Nick Tanora introduces the Alps Active REIT ETF, highlighting its concentrated, fundamental bottom-up approach with a portfolio of 25 to 30 names out of a universe of approximately 140 REITs (11:32).

• Ben Carlson elaborates on the active management advantages, asserting that understanding both real estate fundamentals and securities analysis allows active managers to outperform passive indices by identifying mispriced assets (16:38).

• Michael Batnick references the SPIVA report, noting that unlike in large-cap stocks where 90-95% of active managers underperform, REITs see a much lower percentage of underperformers due to the specialized expertise of remaining managers (19:26).

Sector-Specific Insights

The guests provide detailed analyses of various REIT sectors, including malls, offices, data centers, and residential real estate.

Malls and Retail REITs

• Ben Carlson challenges the notion that malls are universally declining, stating that Class A malls are performing robustly with rising traffic, sales, and leasing activities, while Class C malls are being repurposed for alternative uses (13:57).

Office REITs

• Nick Tanora discusses the ongoing challenges in the office sector, especially in prime locations like downtown Chicago and midtown New York, where top-tier office spaces remain in demand, whereas lower-tier properties struggle (06:53).

• Ben Carlson adds that top-performing office REITs have seen significant rebounds, with some doubling in value after severe downturns, though the sector remains complex and volatile (08:18).

Data Centers

• Paul Biaki and Ben Carlson highlight data centers as a thriving segment within REITs, driven by the rise of AI and increased digital infrastructure needs, constituting about 11% of the REIT market (10:17; 27:19).

Residential REITs

• Ben Carlson outlines the different subcategories within residential REITs, including high-quality apartment REITs, manufactured housing, and single-family rentals, noting the sector's resilience despite housing affordability challenges (29:12).

Investment Strategies and Opportunities

The episode concludes with a forward-looking perspective on investment opportunities within the REIT market.

• Ben Carlson identifies four key themes: secular growth sectors like data centers and senior housing; attractively valued, yield-oriented businesses; beaten-down sectors such as office and cold storage; and biotech REITs (30:27).

• Nick Tanora emphasizes the strategic strengths of their active REIT ETF, including alignment with secular trends, flexibility of the ETF wrapper, and the ability to capitalize on both short-term dislocations and long-term opportunities (32:21).

Notable Quotes

• Ben Carlson: "Cap rates have moved, basically. So the, what's called an implied cap rate of the public market, average implied cap rate of the public market is about 7%." (04:27)

• Nick Tanora: "There's a mix between advisors who are looking to generate extra income from their asset allocation, specifically within the equity sleeve." (08:34)

• Michael Batnick: "Instead of going through all the work workouts and all these things and yeah, negotiating with the banks." (25:07)

• Ben Carlson: "We strive to consistently compound faster than the market." (31:59)

Conclusion

The episode provides a comprehensive analysis of the current real estate market, particularly focusing on the challenges posed by high interest rates and the varied performance across REIT sectors. The experts advocate for active management strategies to navigate the complex and evolving landscape of REIT investments, highlighting the potential for specialized ETFs like the Alps Active REIT ETF to offer superior returns through strategic, high-conviction portfolios.

For listeners interested in exploring further, Alps Funds offers more information on their active REIT ETF at alpsfunds.com.

Timestamp Key:

• 01:13 - Early discussion on the lack of media attention on REITs
• 01:38 - REITs as the worst-performing sector
• 03:24 - Repricing of REITs to current interest rates
• 08:34 - Perception of REITs among advisors
• 10:17 - Historical underperformance of real estate in S&P 500
• 16:38 - Advantages of active REIT management
• 19:26 - SPIVA report insights on REIT managers
• 13:57 - Performance of Class A malls
• 06:53 - Challenges in the office REIT sector
• 10:17; 27:19 - Data centers within REITs
• 29:12 - Overview of residential REITs
• 30:27 - Investment themes and opportunities
• 32:21 - Strategic strengths of active REIT ETF
• 04:27 - Discussion on cap rates
• 08:34 - Advisors' strategies for income generation
• 25:07 - Challenges in private versus public REIT investments
• 31:59 - Ben Carlson on investment philosophy

For further inquiries or detailed analysis, listeners are encouraged to visit alpsfunds.com or contact the hosts via email at animalshere@compoundnews.com.