In our view, the macroeconomic backdrop is supportive for U.S. real estate.
Strong economic growth, low real yields and rising inflation are the ingredients for robust real-estate performance. In 2021, the U.S. economy is forecasted to grow at its strongest rate since 1984. Accelerating growth generally means more jobs and spending, which traditionally translates into leasing (i.e., demand) at residential and commercial properties. Meanwhile, low interest rates enhance the appeal of real-estate yields and suppress the cost of mortgaging property.
Inflation is another consideration. Historically, real estate has performed well as a hedge against rising prices. Rents typically respond positively to inflation as rising earnings support nominal rental demand, while higher construction costs restrict supply. Over time, real-estate prices converge to replacement costs, which are directly tied to inflation. Inflation is currently elevated; whether this is transitory or more persistent remains to be seen, but in the short-term at least, it should support real estate.
As our Chart of the Week shows, a model based on these macro factors paints a bright picture for real estate, with returns greater than 20% in 2021. Importantly, the regression model is statistically significant and explains about half of real estate's historical performance. The model is not perfect: It does not account for demographics, e-commerce, remote working, and other factors that can impact the asset class. And that might have undergone structural changes during the pandemic. Nevertheless, it makes a strong case for real estate over the next year.