Real estate, specifically commercial real estate, is an integral part of a truly diversified portfolio, but not all types of real estate are created equal. Some real estate sectors could be a bear trap while others may provide you with some additional return while lowering your overall risk. Here are some of the best and worst real estate sectors you should consider or avoid right now:
1) Retail Real Estate
WORST: Shopping Centers or Malls. On your daily commute it’s virtually impossible not to pass a vacant shopping center. Whether it’s the fallout from Superstorm Sandy, high unemployment, or lackluster retail sales, shopping centers and malls remain a poor choice for potential growth simply because retail demand has been anemic at best. This can be a great sector to invest in during a growing economy, but for now steer clear.
BEST: Grocery-anchored properties. During a struggling economy it’s best to stick with necessity-based real estate that’s essential to daily life, in this case, food. Necessity-based retail anchored by big-box grocery stores like Kroger or Publix provide a conservative income and growth component to your portfolio and is a pure play on rising food prices (and inflation).
2) Healthcare Real Estate
WORST: Health insurers. Investors should avoid real estate occupied by health insurance companies with Obamacare now a sure thing. With health insurers caught in the cross hairs there’s bound to be some layoffs and increasing vacancies in this sector because of the government coup of mandating private health insurance.
BEST: Health providers. A far better healthcare alternative is again, necessity-based. Consider properties occupied by the very people we entrust to perform tests, outpatient surgeries, or even assisted-living facilities. This sector is bound to do well for a long time to come because of the “graying of America” and the recession-resistant need for healthcare. There’s nothing better than being your doctor’s landlord.
3) Alternative Real Estate
WORST: Recreation properties. It may be fun to play golf, snowboard, or do some boating, but this is one real estate sector that you should steer clear of because the very livelihood of recreational real estate is joined at the hip to economic growth. If the economy is expanding quickly, spending increases on expensive hobbies. If good growth is absent or stagnant, this discretionary spending dries up. Since the U.S. economy is expected to limp along for some time, there are certainly better alternatives than owning the 18th hole on your favorite course.
BEST: Income producing land. Would you like to grow crops and crops of money? Whether you grow corn, trees, or harvest oil and gas, investing in income producing land is one incredible play on rising inflation. Agriculture and energy real estate can provide steady streams of income and potentially significant growth. Some REITs or investment pools are specially designed with the purpose of buying large tracts of land to grow timber, corn, soybeans, wheat, cotton, or even for natural gas or oil exploration.
Take inventory of your 401(k) or investment portfolio holdings and see if you’re holding the best or worst real estate plays. It pays to be ultra-specific especially during a secular bear market.
Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.