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Matt Ritter, senior research consultant for NEPC, joined guest host Meredith Despins, Nareit senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss how REIT-based investment can deliver access to a 21^st century real estate portfolio.

NEPC is an independent investment consultant and private wealth advisor. Its clients—including public pensions, corporate pensions, endowments, foundations, health care groups, and private wealth—collectively represent approximately $1.1 trillion in total assets. Ritter is a member of NEPC’s Real Assets Research Group and the Portfolio Construction Lead for the Real Assets Beta Group.

Speaking to the challenges clients are facing in their real estate portfolios today, Ritter noted that many clients—particularly those with net outflows—are seeking durable income and are asking “what’s the future of my existing portfolio going to look like?”

Historically, many institutional investors have accessed real estate through private markets, which focuses on the four main property types: Office, Apartments, Retail, and Industrial. “We’re seeing a pretty wide range of returns and expectation by property type. This was a trend that was evident prior to the pandemic, but has really accelerated over the past year,” he observed. 

While some real estate sectors are facing headwinds, other property types—such as data centers, self-storage, and life science assets—are benefitting from strong demand tailwinds. Ritter noted that about half of the REIT market cap in the U.S. is already in these alternative property types, while “we’re still many years away from having meaningful allocation in most private investments.” As a result, Ritter is seeing an increased interest in adding exposure to these alternative property types with REITs through portfolio completion strategies.

A portfolio completion strategy is a tool investors have to invest in property sectors, including new economy sectors, that complement the traditional real estate property types in order to achieve more robust diversification, boost portfolio investment returns, and dampen volatility. Today’s REIT industry provides access to 21^st century real estate sectors , including infrastructure, cell towers, data centers, and networked logistics properties that house the growing digital economy.

One challenge investors may face when trying to implement a portfolio completion strategy is that it’s a relatively new idea. “There’s just not always as much long-term data to lean on,” Ritter noted.

He observed that allocations to REITs within pension portfolios has historically been relatively low, but that this may be changing. “We think that REITs present an opportunity to address some challenges that many investors may be facing in their real estate portfolios, most notably liquidity concerns and a desire to access some alternative property types that have long-term strong secular tailwinds.”

The data center industry holds a leadership position on climate change issues as technological advances create greater efficiencies while economies of scale result in a lower energy profile, according to Kyle Myers, senior director of environmental health, safety, and sustainability at CyrusOne, Inc. (Nasdaq: CONE).

Speaking on the REIT Report, Myers pointed to estimates that 1-3% of the entire power consumed on earth is consumed within data centers.

CyrusOne has set a goal of reaching zero carbon emissions by 2040 across the organization. Myers said innovation on the design side is “super important,” while CyrusOne is also looking at existing efficiencies across the portfolio, such as infrastructure and operational improvements.

Myers noted that a key to achieving carbon neutrality is renewable energy and the company has set a goal to be 100% renewable. “We’re going to have to do that to remain cost competitive across the portfolio to hit the 2040 target,” he said.

In European markets, renewable energy is an obvious choice, Myers said. In the United States, meanwhile, it’s easier to secure renewable energy from deregulated markets like Texas, he added. Coastal areas are more challenging because specific regulations make renewable energy expensive, or else it’s just not as available.

CyrusOne is also focused on improving conditions in high-stress environmental areas.

“We’ve made a very strategic decision from a sustainability perspective, as well as from an operations perspective , to use cooling technology that does not consume water,” Myers said.

Myers also discussed new areas of sustainability focus, including low-carbon concrete, investments in green hydrogen, internal carbon taxes, and hybrid cooling systems.

Past racially-explicit policies by federal, state, and local governments—especially those concerning housing—imposed a level of segregation on the United States that was so powerful it still determines the racial landscape of today, according to Richard Rothstein, author of The Color of Law: A Forgotten History of How Our Government Segregated America.

Rothstein is also a distinguished fellow of the Economic Policy Institute and a senior fellow (emeritus) at the Thurgood Marshall Institute of the NAACP Legal Defense Fund.

In a wide-ranging conversation with Nathaalie Carey, Nareit senior vice president for industry affairs and social responsibility, Rothstein pointed to the government’s deliberate move after World War II to create white suburban communities across the country as a key factor in preventing the accumulation of wealth and advancement of the African American population.

Rothstein said it is “essential” to understand that the U.S. does not have a de facto system of racial segregation, but rather “an unconstitutionally created government sponsored system.” He noted that as American citizens, “we are obligated to take remedial action to redress segregation with affirmative action policies in housing and other race-conscious policies designed to undo the effects of these unconstitutional practices.”

Meanwhile, Rothstein also stated that:

• Today, African American incomes on average are about 60% of white incomes while African American wealth is only 5% of white wealth. “That disparity is the ghost of those policies past.”
• To address the lack of affordable housing for Blacks and other minorities, “I’d place more emphasis on improving the incomes of African Americans than on building more concentrated, segregated apartment blocks.”
• A new Civil Rights movement is needed today in order “ to make it uncomfortable to maintain policies of segregation and not to redress them.”
• If the more-integrated communities of the early 20^th century were in place today, “we would have a much healthier society.”
• Affirmative action programs in housing, not merely the prohibition of future discrimination, are needed to redress segregation.

Footnotes:

Resource links provided by Richard Rothstein.

To receive more information about the launch of the New Movement to Redress Racial Segregation, click here.

Watch a brief 8 minute summary of talks about how segregation happened.

See the 17-minute animated film, “Segregated by Design.”

Explore a high school curriculum unit to teach this history (free with registration to receive all materials).

Read a recent article containing material from Richard Rothstein’s ongoing work on what can be done to redress racial segregation.

Read an article on “disparate impact,” or how purportedly race neutral policies today can reinforce racial segregation.