Investing in real assets in a volatile market

The last transformational period for commercial real estate was during COVID. How would you describe the volatility we've been seeing compared to 2020 and 2021?

Jared Sheiker: I would say there are a lot of commonalities. There are certainly idiosyncrasies as well but, as we look at it, in March of 2020 when COVID hit, you had a pretty similar environment. You have a market where traditional capital sources have pulled back, taken a little bit more of a wait-and-see approach. We are hearing of buyers and lenders falling out of deals. What that creates is an environment where we as private-market discretionary capital can jump in and, frankly, buy at levels we view as being very attractive. We think times like this breed a lot of opportunity for investors, particularly those that favor risk-off strategies and have clean books that can then go and play offense.  

Certainly, one of the differences is the rate environment we are in now versus when COVID hit. Obviously, we were in one of the lowest rate environments in history back in 2020. And as you look at the world today, that is certainly not the case. I think the opportunity set here is even more robust than it was five or so years ago.  

And the other thing is—again, yet to be seen—how long this period of uncertainty lasts. But as you recall with COVID, there was a lot of government stimulus in the market very quickly, and that window of opportunity dissipated within three months. In this market, well, it is uncertain what will happen, but it feels like this is a little bit more of an open window to finding opportunity. And at the same time, in a higher rate environment, we think there should be more of both absolute and relative return to be had. And then certainly, as I alluded to earlier, there is the importance of having a book that is, by and large, very clean going into these environments. It really sets you up well to play offense, because, clearly, if your book is weak in these sorts of times, this is when you are going to start to see cracks. We are fortunate to remain a capital provider of choice to the companies that need us even in more challenging periods of time—and that is because of how we set ourselves up in terms of portfolio construction. 

What kinds of effects can tariffs have on commercial real estate?  

A: For one, we think it makes the assets we already own, frankly, more attractive, more valuable, and more mission critical to their tenants and occupiers. To replicate those properties now will likely cost meaningfully more than it did several months ago. So the idea that a tenant is going to leave an existing asset and develop a new asset in a higher cost environment becomes less likely. It makes our assets much stickier, which is something that we like from an investment standpoint.

I think where it does impact us—and it is something that we are monitoring very closely—is how increased costs may affect new-construction prices as we pursue build-to-suit projects. If this tariff environment turns out to be transient, you could be in a window where you are paying 10,15, 20% more to build an asset and, six months from now, it could be 20% less to build the same asset.  And as a result, you may have rents that are meaningfully higher than they should be—that is something we are incredibly focused on.

Another point to consider is who our tenants are. These are some of the best and brightest companies in the world. They are investment grade, high quality businesses. And while we do think companies across the board will be impacted by tariffs, we think that larger investment-grade businesses should be more resilient than others. 

And how may tariffs change companies’ real estate strategies?

A: You are seeing clearly a trend of onshoring and reshoring. For companies in manufacturing, a lot of that manifests in new investment in real estate within the United States. If you are bringing jobs back from, say, Mexico to the United States, you have to build those assets to move that business back. That is a pretty significant tailwind for our net lease strategy, because it gives us a broader opportunity set to capitalize projects on behalf of our customers and our tenants.

We've been seeing massive volatility in equity and treasury markets. How is real estate comparing to those sectors?  

A: Broadly speaking, real estate is not immune to the impacts of the volatility. But we have seen our long-duration net lease strategy be meaningfully less volatile than the broader market. One of the great benefits that we have are long-term leases that are fully triple net. So, what does that mean? That means our tenants are fully responsible for all costs under the lease: insurance, real estate, taxes, maintenance, capex—you name it. And in a higher cost environment, that is a very important thing, because none of those increased costs are borne by us. And then, importantly, all our leases have contractual net rent escalators. Irrespective of those expenses, we see net operating increases every year because of this structure. And in an environment where you have rising costs, but maybe lower growth, that is an incredibly powerful thing—even more so when we have investment-grade companies as tenants.  

You referred to manufacturing as possibly having a tailwind due to onshoring and reshoring. Are there other sectors poised to do better during these volatile times?  

A: We certainly see great opportunity in manufacturing as a lot of companies look to bring their footprints back to the United States. There are knock-on effects as it relates to distribution, cold storage and all things related to logistics as these manufacturing facilities tend to create a larger ecosystem around them. Digital infrastructure continues to be probably the most attractive opportunity we have seen, almost bar none. And this environment really has not put any damper on digital infrastructure and data centers. The needs of Microsoft, Amazon, Oracle, Google, etc., are not really impacted by tariffs. Ultimately, they need the capacity. We think it’s a great spot to be and believe we are incredibly well positioned to be a leading partner to these companies.