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Specialty Asset Management

2021 Outlook Update

Hilltop view of farmland during sunset

The U.S. is leading the charge and is expected to be the fastest-growing major economy in 2021 thanks to unprecedented fiscal and monetary stimulus, as well as a highly successful vaccination program. The global consumer is now entering a period of unfettered pent-up demand based on an aspirational intent to buy goods, services and experiences. The convergence of rising wages, improving employment trends, successful coronavirus vaccines, a third significant stimulus payment and the seasonal improvement in weather conditions all help contribute to consumer spending and demand. All of these catalysts, coupled with recent housing formations, flexible work environments and the desire to “get back out there” may provide an extended period of visible and sustainable growth in the real asset sector.

In addition to the “pandemic recovery,” various structural trends are projected to drive demand for real assets in the long term. Supply constraints should also drive land values higher as industrialization and climate change threaten the world’s supply of arable land. These supply-side pressures highlight the importance of global trade for meeting worldwide agricultural demand and combating food insecurity. The USDA projects that, over the decade, the total population that is food insecure across low- and middle- income countries will decline by 45%. U.S. agricultural trade is key to meeting these targets, but rising trade barriers and protectionist policies could undermine U.S. exports. An escalation of global trade tensions remains a key risk to watch.

Amid the heightened economic growth expectations and geopolitical uncertainty, investors who are focused on the long-term time horizon can position real assets as a way to increase portfolio diversification while potentially generating favorable risk-adjusted returns in the long run. In addition to providing uncorrelated returns, these assets may also serve as a hedge against inflation while generating cash flow and, in some cases, provide tax advantages for high-net-worth investors.

The farmland sector has responded strongly as it continues to recover from the demand shocks and uncertainty brought on by the coronavirus (COVID-19) pandemic. Average farm prices for corn and soybeans in the 2021/2022 market are projected to be higher year over year, although these prices have started to moderate as 2021 planting progress improves. The near-term outlook for land values is positive and the longer- term trends of increasing global consumption and demand for farm exports remain firmly in place.

Housing demand initially hit a temporary setback due to COVID-19, but was quickly restored with renewed lumber consumption brought on by first-time home buyers and those fleeing populated urban concentrations in favor of the suburbs. As the world emerges from the pandemic and progress towards return to work and normalcy continues, we expect markets to stabilize with sustainable lumber demand. Individual markets are already showing real timber price growth as the increased demand continues to absorb supply.

In 2021, oil prices have significantly bounced back after the fallout of the pandemic. On a global scale, oil demand has recovered with the opening of economies in a cautious effort to return to normal. While operational activity has increased, new drilling is still slower to recover than expected. We expect to see less volatility going forward through the second half of 2021, but we are keeping our eye on global events and policy that could have an impact.

Commercial Real Estate
CRE initially took a big hit as hotels, retail and offices were impacted by lockdowns, and employers embraced stay-at- home strategies. Other property types were also affected while cash flow variability and pro forma bad debts have been top of mind for investors. CRE capital markets are showing signs of recovery as states progressed with opening from the pandemic. And, in this yield-starved, low-rate environment, CRE should benefit from continuing low interest rates driving investor allocations to the sector and helping to keep cap rates relatively low.


Farmland values were resilient amid the lower commodity price environment experienced in recent years and responded robustly as the agriculture economy began to recover from the demand shocks and uncertainty brought on by the COVID-19 pandemic. Rising grain prices, government assistance payments and low interest rates fueled farmland prices in the second half of 2020, and this support has continued through the first half of 2021. Land values in most core row crop areas were up 5%-10% or more during this period (second half of 2020 first half of 2021) with some areas seeing sales approaching 2012/2013 levels.

The harvest rally for old and new crop commodity prices continued in the first half of 2021. Cash and futures market prices for corn and soybeans began rising significantly in the late summer of 2020 and have remained at elevated levels through the first half of 2021. Average farm prices received for corn and soybeans in the 2021/2022 market are projected to be higher year over year, although prices have started to moderate as 2021 planting progress improves.

However, with stocks to use ratios at multi-year lows and projected to remain tight for the 2021/2022 marketing year, any production concerns could fuel additional strength. The agricultural markets will be monitoring weather trends and global crop production estimates closely during the 2021 growing season. Increased volatility in commodity prices is expected given these current supply and demand fundamentals. With demand far surpassing increases in supply, the USDA forecasts the inventory of soybeans by the end of the current marketing year to plunge to 135 million bushels. If realized, that would be lower than at any point since the historically low stock level of 92 million bushels in 2013/2014.

Prices received for corn and soybeans, by month

Prices received for corn and soybeans, by month

Source: United States Department of Agriculture (USDA) National Agricultural Statistics Service. Data as of May 28, 2021.

The harvest rally for old and new crop commodity prices continued in the first half of 2021.

What’s trending in agriculture?

Trade — Positive developments on trade over the last 12 to 18 months have been beneficial for U.S. agricultural exports. Additionally, the weaker dollar has helped U.S. commodities remain attractive to many key export markets, including China, which has returned as a primary purchaser of U.S. agricultural goods. U.S. agricultural exports are forecast for a record high in 2021 due to higher prices and strong demand. China is projected to remain the largest U.S. agricultural market in FY 2021, followed by Canada and Mexico (Source USDA).

Sustainability and conservation — In recent years, there has been an enhanced focus centered on the adoption of conservation practices in agriculture. The trend continues with even greater emphasis. Many corporations are stepping in to help promote conservation practices and quantify these practices into carbon credits and additional farm revenue. U.S. agriculture may, in certain situations, contribute to biologic carbon sequestration by storing carbon dioxide in soils, trees and plants. This trend is expected to intensify in the coming years creating a great opportunity to not only improve sustainability on farmland, but also potentially drive higher returns from doing so. Agriculture will likely provide a strategy and potentially play a key role in achieving the conservation goals needed to reach net-zero emissions.

Cash rental rates and returns

Most farmland continues to trade as a function of the revenue it produces. Although capitalization rates have compressed in recent years during the lower commodity price environment there will be increased competition for rented farmland as commodity prices rise and prospects for profitability improve. The emerging demand for agriculture will push rents higher. This trend started in the beginning of 2021 as rental rates correlated with higher land values. Flexible lease arrangements should benefit greatly from the higher revenue prospects in the current environment.

Looking Ahead

The supply of farmland in the market is expected  to remain low for the remainder of 2021. However, there is some uncertainty with respect to tax policy that may influence sellers as possible modifications to capital gains, estate taxes and Section 1031 exchanges could impact the supply of land for sale. Impending changes here could encourage more sales in the second half of 2021, but buyer demand

is expected to be more than adequate to absorb any increases in supply as the limited inventory over the last several years has many investors still looking to add to the asset class or gain exposure to the asset for the first time.

Additionally, the financial health of the agriculture sector is improving and farmers are being more active with land purchases. This should also provide additional strength for land values throughout 2021. The near-term outlook for land values is positive, and the longer-term trends of increasing global consumption and demand for farm exports remain firmly in place for the asset class.


The major theme of the first half of 2021 is the recurring question, “If lumber has hit record high prices, why have timber prices remained flat?” It’s a good question, and the answer is pretty simple: There isn’t enough lumber, and there is too much timber. As is usually the case, the details make the answer a little less simple, but still straightforward.

Taking lumber demand and supply first, one has to look at the years after the housing crisis and the low demand for housing that translated into lower lumber demand. This became a protracted period of low demand that resulted in the closure or curtailment of significant lumber production capacity. Housing demand began to show some improvement in late 2019. This early housing boost was temporarily set back by initial COVID-19 protocols, but was quickly restored by renewed interest with first-time buyers and enhanced by urban residents fleeing population concentrations over pandemic fears.

While most analysts believe the record spike in lumber prices is not sustainable (since lumber capacity is being increased aggressively, high prices may dampen lumber demand, and some of the demand drivers from pandemic and social issues are likely to recede), most also agree that we are probably entering a period of more reasonable and sustainable lumber demand due to core fundamentals. These fundamentals include current interest rates, generational housing demand, and the realization that for many, work from home is a viable option making home locations more flexible.

New privately owned housing units authorized by building permits

New privately owned housing units authorized by building permits

Source: U.S. Census Bureau and Forisk. Data as of December 7, 2020.

Housing demand began to show some improvement in late 2019. and most agree that we are probably entering a period of more reasonable and sustainable lumber demand.

Now consider the timber supply and demand component. Obviously, one needs timber to make lumber, but they are distinctly different markets and always have been. Since the inception of the housing crisis, sawtimber demand has been impacted by lower lumber demand. This correlation provides a unique opportunity for a patient timber owner as trees continue to grow and build greater volumes of timber product over time, represented by unrealized appreciation of timber inventory. The risk in this situation is when demand for timber accelerates as a reflection of the increased need for lumber needs, the oversupply may result in flat timber prices, despite the increase in demand.

Timber trends to the south

Many lumber producers are relocating or increasing investments in the southern U.S., seeking the lower timber prices for their raw material. In some cases, Canadian firms in British Columbia have moved to the south, fleeing limited timber supplies in their traditional areas, and in favor of the advantages of cheaper raw material. Forisk reports that lumber capacity increased in the U.S. South by 1.1 billion board feet over the past year, or approximately a 5% increase. Capacity elsewhere in North America increased an additional 300 million board feet. These mills, and the capacity that was already there, will need timber to keep running.

While broad southwide timber averages still show flat, the more robust individual markets are already showing real timber price increases as the increased demand continues to absorb supply. Timber markets tend to adjust slowly, a low volatility attribute that is appealing to many investors, but this means that broad changes in timber prices in the south are likely to still take  some time.

Looking Ahead

Countering downside concerns, timberland remains an effective inflation hedge, and this is of increasing interest to investors concerned over signs of potential inflation. Of additional interest, new platforms for landowners to monetize carbon sequestration in a manner that is much more flexible to their traditional management are emerging. While revenue opportunities are much lower, they are also based on annual contracts, not the 40-100 years of traditional carbon contracts. These platforms warrant additional investigation. Additionally, the long-term outlook for housing and forest product packaging seems strong given work-from-home and shop-from-home changes to society.

Patient investors with a long-term outlook, a bias toward capital appreciation/preservation (with a limited demand for yield), concerns about inflation, and seeking a risk diversification asset class strongly competitive with assets of similar attributes, may be well-suited to consider timberland for their portfolio.

No outlook is complete without an objective consideration of potential headwinds for an asset. One issue we are watching is the current administration’s desire to increase the capital gains tax rate. Timberland has long enjoyed the potential for capital gains treatment of timber sale revenue, so this is an issue of interest. While a compromise increase seems likely, the tax advantages of timberland may be adjusted at some point due to tax policy. It seems unlikely that the new capital gains rate would equal the top ordinary income rate, retaining some tax efficiency for the asset class.


A significant recovery in oil prices in the first half of 2021 is a stark contrast to the fallout from the pandemic that started in early 2020. Global oil demand has recovered with the progress made in reopening economies in a cautious but focused effort to return to normal. That factor combined with the new administration’s views on fossil fuels have increased the oil price as well. Cancellation of the Keystone Pipeline and eliminating new drilling on federal lands results in reducing U.S. production while increasing prices. The WTI oil prices returned to $60/bbl– $65/bbl in February and has increased steadily since.

The higher oil prices have resulted in the return of operator activity levels. A return closer to pre-COVID levels is evident with maintenance and workover projects being more economically favorable. While operational activity has increased, new drilling is still slower to recover than expected. The shut downs and halting of operations in 2020 left a large inventory of DUC (drilled but uncompleted) wells on the books for many operators. Despite the increase in rig count in oil plays, operators appear to have cut back their focus from drilling and are focused on working down the backlog of DUC wells in 2021. The focus on completing or “fracking” these DUC wells is a solid measure of production intentions and activity.

Monthly change in drilled but uncompleted (DUC) inventory

Monthly change in drilled but uncompleted (DUC) inventory

Source: Data as of May 17, 2021.

Looking Ahead

Less volatility is expected going forward through the remainder of 2021. There are, however, particular events that can have short term effects, such as slight increases in commodity prices due to the late February Texas winter freeze and the hacking of the Colonial Pipeline, and slight decreases in commodity prices due to the discussions of reviving the nuclear deal with Iran. These events have short term effects, but in the big picture view of commodity prices we expect to hold and maintain in the $60/bbl–$70/bbl range for the remainder of the year.

Commercial Real Estate

The critical question facing commercial real estate (CRE) heading into the pandemic hinged on whether the economy would experience a V-shaped, U-shaped or W-shaped downturn. More than a year later, with businesses reopening and vaccines holding promise of a rapid recovery, the verdict is in. For U.S. CRE overall, the COVID-19 recession at this point played out a steep and sharp V-shaped event, with performance rapidly recovering.

While CRE in aggregate has been resilient through the crisis, a closer look — not surprisingly — reveals material disparities across sectors. Industrial performed extremely well with steady occupancies and net operating income (NOI) growth. Multi-family demonstrated a strong ability to retain residents, although a reliance on rent accommodations and regulatory measures cuts into the near term ability to grow NOI for some properties.

Retail and hotels, by comparison, succumbed to the twin weights of regulatory and social restrictions, which exacerbated challenging pre-pandemic trends including significant drops in occupancy and NOI growth for traditional brick-and-mortar retail, and stiff competition in lodging due in part to a robust construction cycle colliding with the force of the pandemic. And in the complicated office sector, fundamental questions center on potentially long-term headwinds. Work-from-home worked as offices were emptied by social restrictions, and suburbanization is emerging as a counterweight to decades of urbanization of workplaces and densification of workspaces.

Four-quarter rolling NOI growth by property type

Source: National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI). Data as of March 31, 2021.

CRE in aggregate has been resilient, with performance rapidly recovering, but NOI varying across sectors.

Vacancy rate by property type

Source: NCREIF NPI. Data as of March 31, 2021.

Across the CRE landscape, the pandemic to a great extent has accelerated secular trends being driven by the digital economy. Property fundamentals were synthetically altered to some extent, with accommodative regulatory policy and forbearance programs, in tandem with low interest rates masking potential corporate insolvencies, tenants’ rent-paying capacity and distressed assets. And in the coming months, property owners will want to monitor the Fed’s ability to manage a surge in transitory inflation without stalling out a rebound in jobs and recovery in economic growth, both important drivers of CRE demand.

Outlook by property type

Lodging experienced an immediate shock to demand as  leisure travel, business travel and international travel rapidly ground to a halt with hotel occupancy and RevPar plummeting during the pandemic. Considered a higher beta sector, hotels respond well during an expansion phase, however, in this case there are some factors working against a normal recovery. First, heading into the crisis, the hotel sector had a significant new supply pipeline; and second, until travel — particularly business travel — comes back, occupancies can be expected to be challenged. Hotels focused on the leisure travel segment are coming back first, while business travel hotel segment can be expected to take much longer.

Retail’s continuing disintermediation by e-commerce accelerated during the pandemic and likely continues. There’s a wide dispersion within the sector with necessity and convenience retail emerging as longer-term survivors. Notwithstanding the pandemic, some retail formats such as regional malls and some power center formats will continue to struggle for systemic reasons, shifting in the demand curve for space, as they are massively exposed to share grab by internet shopping. Grocery, pharmacy, quick-serve and other essential retail is doing well with consumer practices driving a broadening use of many stores, for example buying online with in-store and curbside pickup and return.

Office sector is susceptible to continued disruption with potential systemic implications of its own. The wholesale densification trend, on-going for decades, likely softens at least near term. Shared and flex office models will encounter speed bumps as firms sort out space needs — how much, where, what type and design. Offices and architecture play a critical role in collaboration, recruitment, relationship-building, teaming, creativity, innovation and idea generation — key ingredients for the recipe of productive corporate cultures and successful businesses, as well as important drivers for what may frame up to be an accelerated back-to-office posture by many businesses. Although resilient so far, going forward office markets will likely experience near term softness with pressure on vacancy and rents as an evolving hybrid of in-office and work-from-home strategies are used, alongside a recalibration of how much space and where is required by businesses.

Multi-family apartment sector is generally defensive and, along with industrial, perhaps least impacted in aggregate of the major sectors by the pandemic. Historically, multi- family rents and occupancies tend to decline the least and recover before other major property types. The U.S. economy provides a healthy backdrop as re-openings pick up and employment picture improves, but still has more to go to reach pre-pandemic levels. The demographic tailwinds from high-propensity to rent millennials combined with “Gen Z” represent significant demand generators for rental housing. Suburban markets, fiscal stimulus and regulatory pressures helped smooth performance edges as rent collection experience has been better than many expected and lenders provided forbearance options for landlords. Overall, cap rates have compressed with significant and growing investor demand for the sector.

Current value cap rates by property type

Source: NCREIF NPI. Data as of March 31, 2021.

Industrial e-commerce and global-to-local trends continue to accelerate, supporting the industrial sector long-term, likely with refined definition around key sector subsets such as last-mile logistics, regional and bulk distribution, and assembly and manufacturing. The industrial value chain increases with closer proximity to the final customer, which benefit most from growth in e-commerce and represent infill and often supply-constrained locations with high barriers to entry. Playing out over a longer period of time, as business inventory levels increase resulting from a supply chain shift from just-in-time to just-in-case, a corresponding increase in demand for industrial space can be expected.  Here too, investor demand for the sector is robust and cap rates have compressed.

Distress… to be or not to be

CRE distress so far has been limited and largely contained in hotel and retail sectors. Time will tell, as sector fundamentals play out and the considerable capital raised for U.S. CRE will provide a strong bid for performing and non-performing assets alike, perhaps softening the severity of distress.

Many expected to acquire properties on the cheap by exploiting the collision between the first-loss equity position and lenders’ desire for quick resolution of distressed assets, presumably through note sales, foreclosures or property and entity recapitalizations. Predictably, this simply has not yet occurred in any meaningful amount largely because owners have not been forced to sell at discounted prices, in part stemming from significant regulatory and fiscal support, along with low interest rates and lenders’ general unwillingness to book losses. Among the most vulnerable property types include business traveler lodging, malls, office, multi-family and non-essential potentially obsolete retail.

CRE attributes

Consider the chart below. While appreciation stalls or temporarily becomes negative, income returns have historically remained steady, a calm through the storms over the years. Cash flows from contractual leases can help insulate real estate portfolios from the volatility that comes with stock and bond investments, as well as offer prospects for dividend growth. The compounding effect of consistent and often growing cash flow over time is a powerful return driver, often sailing relatively smoothly through recessions, market downdrafts and periods of inflation.

NCREIF returns

Source: NCREIF NPI. Data as of March 31, 2021.

Looking Ahead

CRE fundamentals are expected to continue improving during 2021-22, with a strengthening of demand overall and relatively limited new supply. In aggregate CRE prices are rising with positive annual returns year-over-year (CPPI Real Capital Analytics). The pandemic continues to have an impact on CRE but is affecting property types differently (see Outlook by property type).

As the Fed solves for the Goldilocks dilemma of too little or too much accommodation and markets wrestle with heightened inflationary expectations, well-selected CRE investments offer a potential haven of high current income, capital appreciation and attractive risk-adjusted returns, along with protection against periods of inflationary pressures. Entering the new post-COVID normal, CRE also provides investors with dynamic opportunities to benefit from domestic and global macroeconomic and market trends.

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