By Harvest ETFs
In 2021 US real estate experienced its biggest shift since 2008. The so-called ‘urban exodus’ saw hundreds of thousands of Americans move from expensive, coastal, powerhouse cities like New York and San Francisco to cheaper markets with warmer climates like Charlotte, Austin, and Phoenix.
Even more Americans moved from dense urban cores of these major cities out to the suburbs, as millennials began to enter their 40s and moved where they could afford more space. Demographic tailwinds and consumer preferences had already been shifting US residential demand towards smaller, warmer cities, but 2021 turned that trend up to 11.
This trend was one of many captured by the Harvest Global REIT Leaders Income ETF (HGR:TSX). This ETF holds REITs in the US, Australia, Singapore, Europe and Canada and cuts across broad subsectors of real estate, including industrial, specialty, and even some retail. However, its US holdings in apartments and rental housing have been especially well positioned as countless Americans move.
“We don’t currently own any REITs focused on apartment buildings in these huge ‘gateway’ 24/7 cities like New York and San Francisco,” said Mike Dragosits, the Portfolio Manager at Harvest ETFs responsible for HGR. “We have been more inclined to hold a REIT like Camden Property with much greater exposure to apartment buildings in those sunbelt destinations, the 9-to-5 cities and suburbs that people are moving to in states like Florida, Georgia and Texas.”
That position has been borne out by the numbers. According to the US Census Bureau, more than 300,000 people moved to Texas in 2021, over 200,000 moved to Florida, and Georgia, Arizona, and North Carolina each saw around 100,000 new arrivals.
Those markets, which have become even more desirable in a post-Pandemic world, have seen massive rent increases as big-city dwellers with big-city incomes move further out. According to US-based rental housing aggregator Apartment List, Tampa FL, St. Petersburg FL, Scottsdale AZ, Orlando FL, Mesa AZ, and Phoenix AZ were all among the fastest-growing rental markets in 2021, with growth rates above or very near 30%.
That trend has driven huge demand for single-family homes as well, an area that investors can’t access through Canadian REITs, and is captured by HGR in the form of Invitation Homes, a US home leasing company specializing in single-family units. The single-family housing market was incredibly competitive for buyers in 2021, forcing many home-seekers to alternative solutions that firms like Invitations Homes provide.
All this movement has also driven serious demand for storage space, and HGR is positioned there as well. HGR includes storage REITs, not only in the US, but overseas as well, that have benefitted from increased demand over the past year. They have become even more attractive as their short tenant lease profile allows them the unique ability to adjust prices month to month, compensating for inflation.
These trends, Dragosits said, have a staying power beyond simply the flash in the pan moment of 2021. The trends we saw in 2021 have been ongoing for some time, and American demand for what the US residential and specialized REITs in HGR provide does not look to abate any time soon.
Dragosits emphasized that HGR’s diverse global holdings offer exposure to much more than just US residential real estate. But the trends we saw in that subsector last year have demonstrated HGR’s strategy to be an effective one. By owning REITs that own the apartment buildings, storage lockers, and single-family rental developments in popular cities for American movers, HGR has been able to capture this trend of internal migration.
REITs themselves are an incredibly high-yield vehicle, with most required to pay 90% of their taxable income to shareholders. Coupled with Harvest’s active covered call strategy, HGRs position in these key US real estate subsectors has meant consistent income for investors.
The old rule of real estate is ‘location, location, location’ and as the US continues to experience its ‘urban exodus’ HGR is in all the right places.
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Quoted in this article
Mike Dragosits, CFA