America is about to get back to “business as usual” in a big way in 2021 as COVID-19 vaccines hit the market and companies reopen their doors for business.
As 2020 draws to a close, it would be an understatement to say that COVID-19 has transformed society. The raging pandemic along with its associated lockdowns and social distancing has instilled in many of us a sense of uncertainty and fear.
With many aspects of our lives becoming more remote, mobile, and reclusive (i.e., education, work, shopping, and entertainment) our homes have become more than just shelters, they’ve become our safe havens, schools, as well as offices.
Just as the pandemic forced many of us to withdraw socially, many of us also withdrew financially – cashing out of our investment portfolios in droves. In June, the Wall Street Journal reported that investors were sitting on the biggest pile of cash ever – to the tune of $4.6 trillion.
Many cashed out from fear. Others like elite investors – ultra-rich individuals, family offices, foundations, and endowments – were waiting to go bargain shopping in 2021.
Many investors are approaching 2021 with hope and optimism while others are approaching with fear and uncertainty. I’m approaching the new year head-on, poised to take advantage of opportunities that I find and that come my way.
Should investors be fearful in 2021?
Wall Street investors should be fearful. Investors in private alternatives, on the other hand, have reason to be optimistic. Why should Wall Street investors be fearful?
The cards are stacked against the public equities markets in 2021. For one, stocks are way overvalued. A stock’s price to earnings (P/E) ratio has historically been a reliable measure of whether the stock is overvalued. A high P/E ratio is a sign the price of a stock is trading well beyond what’s reasonable considering the underlying economic metrics.
What’s a normal P/E ratio? Historically, the average P/E for the Dow is around 16. The Dow is currently trading at a P/E ratio of around 30. That is nearly double the historic average and it has experts sounding the alarm left and right. The stock market is overvalued!
On top of swollen stock prices, inflation is the other elephant in the room. With investors historically reacting negatively to inflation, many feel it’s only a matter of time before the trillions of dollars pumped into the economy from recent and proposed COVID-19 economic stimulus packages come home to roost in the form of inflation – inevitably driving the stock market down.
For investors seeking alternative assets, it’s not all doom and gloom. Where is the opportunity? The short answer is there’s always an opportunity in housing because housing is essential.
People will always need shelter. And as the pandemic has proven, while some industries may suffer more than others like retail, travel, and restaurants, there is always going to be demand for housing. Demand may shift away from higher-end assets and markets, but those fleeing residents have to go somewhere, so most downsize.
2020 has had an interesting effect on housing. Many workers who transitioned to working remotely realized they were no longer tied down to a specific location.
Why pay high taxes on coastal states in big cities? Why deal with riding subways shoulder to shoulder and risk illness?
And so began a mass migration in 2020 of workers, families, and individuals to smaller markets where a dollar could buy or rent 2, 3, 4 times the space of properties available in New York or Los Angeles.
As an essential asset, cash flowing multifamily real estate – especially in the affordable to midlevel segments – has always been a good investment and are an especially good hedge against downturns as people downsize in the face of economic adversity. Elite investors have long leveraged the income along with appreciation from these assets to build long-term multi-generational wealth.
What about inflation? There’s nothing to worry about. Real estate moves with inflation.
A recent Wall Street Journal article singled out real estate as one of the top two assets with the highest correlation to inflation of any investment class – based on 50 years of data. Not only do the underlying values of cash flowing real estate go up during inflationary periods, but the rents tenants pay also go up with negligible effect on demand – especially in segments like multifamily that are already in short supply.
As we emerge from our social and financial cocoons, now is not a time to be afraid to invest. With all the uncertainty facing public equities, cash flowing hard assets will be the calm in the investment storm in 2021.
As an essential asset at the center of a transformative trend of migration away from primary markets, multifamily housing in secondary and tertiary markets is as safe an investment as you’ll be able to find.
You just have to be ready to take advantage of the opportunities.