Where to Invest in Real Estate Right Now, and Where Not to, Say 2 CIOs

Ohio SERS’s Majeed and NEBF’s Tarbox assess infrastructure, offices, retail, and more in our webinar.


Data centers and infrastructure are promising. Offices aren’t, but the situation there may not be as dire as many fear. Maybe urban centers won’t go down the chute, after all. Some retail will be OK. Forget about farmland.

These are among the insightful observations from CIO’s latest episode in our “2021 Asset Allocator Series.” With institutional investors looking for opportunities not correlated to equities, yet offering better returns than fixed income amid low interest rates, the session, which focused on real estate and real assets, was a bonanza of useful information.

The webinar, held Tuesday, featured two asset allocators with strong real estate expertise: Farouki Majeed, CIO of the School Employees Retirement System (SERS) of Ohio, and Monte Tarbox, executive director, investments, for the National Electrical Benefit Fund (NEBF). Christine Giordano, CIO’s managing editor, was the moderator.

To Tarbox, real estate is “the best diversifier,” and he expects its allocation in his $16 billion portfolio (already at 17% of the total fund) to remain steady in coming years. “Especially if we have another decade of low interest rates” ahead, he added. His fund is likely to boost its allocation to infrastructure alongside of its existing commitments to real estate.

In addition to real estate’s lack of correlation with the stock market, Majeed pointed to this most tangible asset class’s “stable income.”

Right now, data centers are all the rage as the US and the world become increasingly digital. “If not for data centers, our core real estate portfolio would’ve been negative in 2020,” Tarbox said. By the same token, he acknowledged that, as ever, there was a danger of overbuilding.

In the future, it may be possible to run more data through existing fiber-optic cables and other delivery pipes, he said. “Just because demand for internet service is increasing,” he maintained, “don’t assume that the supply of internet facilities will need to increase linearly.” Tarbox invoked the history of railroads, which expanded enormously in the 1800s, only to face a shake-out later.

Infrastructure has had some great returns in recent turns, like 10% yearly over the past decade, Majeed said. The likes of toll roads and seaports suffered during the pandemic, yet their performance has prompted him to increase infra’s portion of his $17 billion portfolio during his nine-year tenure helming the pension plan.

Majeed’s fund infrastructure investing is global, with other real estate focuses on the US, he said, with just 15% outside this country, mostly in Europe. Nonetheless, this “expanding opportunity set” means that it’s wise to “take a global approach” since more opportunities exist abroad. President Joe Biden’s infrastructure proposal, if enacted, may change that dynamic somewhat, he conceded.  Tarbox supports the president’s infrastructure proposal, but he is uncertain about what opportunities it will create for private investment.

The two CIOs noted that offices are in a problematical position, amid talk about reducing space amid a work-from-home ethos that the virus has spawned. Majeed foresees “a transition away from trophy properties” in the largest cities like New York and Chicago, and perhaps a lower footprint needed for office workers. On the other hand, widening distances between desks could be a factor that would push some office tenants to need even more space, he observed.

Tarbox, for his part, was skeptical that the downtown office market was in big trouble. “Once the health crisis is over, people will want to get back to the office,” he said. “Everybody is getting weary about working from home,” notably “younger staff with kids.” For every business that is reducing its demand for office space, there appear to be others that are increasing their footprint. “We do not have any clarity yet about the trend,” he said.

Indeed, sub-tenant leasing in central business districts has contracted of late, Tarbox said, but much of that is due to the usual fallout from any recession—companies go out of business. While he doubted the demand for offices would collapse, he predicted that “valuation models must be re-calibrated,” with slower rent rises, which could lead in the short run t

Tarbox advised investors, when doing their real estate due diligence, to examine the types of tenants in an office building. The office market “is not monolithic,” he said. If tenants are retail managers, for instance, they might be more precarious than a law firm.

As for the demise of cities, Tarbox found “no discernable trend.” Anecdotally, he said he’d heard as many tales of people abandoning the cities for the suburbs as the other way around. “Maybe they can wave at each other as they’re going past,” he quipped.

In terms of retail, Majeed said the prognosis depended on the type of asset. Strip malls with drugstores and supermarkets should be fine, he said. But “mega-malls will have to be re-positioned,” he said, with some of their space devoted to other uses, such as apartments.  

While farmland has gotten attention in some investing circles nowadays, both panelists termed it a bad investment. Those piling into agricultural land may find “that’s not a good thing,” Majeed said, calling it “overpriced.”

To Tarbox, whose family members in previous generations were farmers, making a go of farming “is very tough.” In fact, he said, “the way to make a small fortune in farming is to start with a large fortune.”

Although some analysts have blamed the pandemic for upending a lot of economic verities, Tarbox said all that COVID-19 did “was accelerate the trends.”

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