Disruptive events like the pandemic always create their own winners and losers. The difference between commercial real estate portfolios that suffered and those that prospered is partially down to industry-level risk.
Industry risk is one of the most important ways we evaluate a new property. Is this industry growing? How does demand look in the future overall and in a particular location? And critically, what will happen in hard times?
You didn’t have to foresee the pandemic to imagine some future recession. If you don’t have a clear picture of how the tenants of a property are likely to fare in a downturn, then you don’t understand your risk.
Properties that host non-essential, face-to-face services overall did poorly in the pandemic. Retail largely moved online, office occupancy went way down, and people cut back a lot on eating out.
In contrast, Alliance’s portfolio has a big concentration in specialty medical facilities. People who need kidney dialysis are going to keep showing up, rain, shine, or pandemic. This kind of medical care must be in-person and cannot be displaced by technology or outsourcing.
We have done very well over the years by focusing and developing deep expertise in this niche. Our deep understanding of the details of this market helps us find great deals. But the game is always changing, and we are constantly evaluating new opportunities.
Aside from our core medical industry, Alliance owns logistics, software, grocery stores, and other properties. These other industries also did well over the last year, for similar reasons. They perform vital functions that customers need, even in hard times.
Of course, industry risk isn’t the only important risk. Location risk matters a lot too, and we’re always careful to consider potential disasters, demographic changes, and other risks associated with a specific location. Taxes, zoning, and other regulatory requirements also factor in. And nothing matters more than supply and demand.
To beat the market in commercial real estate, you have to closely consider the viability of tenants’ businesses. Our portfolio has great resilient tenants, and our returns reflect that.