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Real Assets in a New Decade

Investments with Tangible Worth and Intangible Value

Real assets can be an essential element in a well-managed investment portfolio. This asset class — which includes agriculture, timberland, commercial real estate and energy — may provide the opportunity for attractive long-term total returns, inflation protection, and offset the volatility of equity and fixed- income investments.

"Real assets are in phase 1 of a multi-phase evolution. In our view, real assets should continue to provide diversifying characteristics to a portfolio, especially during short term extreme volatility in the capital markets, and increasingly the potential for return opportunities in the years ahead."

Chris Hyzy Chief Investment Officer

For investors wishing to leave a legacy, specialty assets may provide the ability to pass on something real, tangible and valuable to future generations. For those interested in creating positive social change, these assets may offer the opportunity to invest in sustainable and environmentally sensitive resources. In summary, specialty assets may be a solid investment that may help investors “do well while doing good.” 

The global economy will continue to face a high degree of economic uncertainty throughout 2020. Positive developments in recent months — including the signing of a “Phase 1” U.S.-China trade deal and signs of more accommodative central bank policy — should support a rebound in growth, although this rebound is likely to be delayed given the rising risks and growing impact of the coronavirus. Despite these near-term cyclical headwinds to growth, various structural trends are projected to drive demand for specialty assets over the next several decades to come.

External shocks expose potential short run market and economic weaknesses, while simultaneously reinforce the investment utility of real assets in a diversified portfolio. Amid heightened market volatility, and economic and geopolitical uncertainty, investors focused on the long-term horizon can position specialty assets as a way to increase portfolio diversification while generating potential risk-adjusted returns in the long run. Often highlighted by such market shocks and uncertainties, the primary reasons to consider real assets as a possible diversifier haven’t changed. In addition to providing potential uncorrelated returns, real assets may also serve as a hedge against inflation, generate cash flow and, in some cases, may provide tax advantages for high-net-worth investors.

Global demand for food products should remain strong this decade amid two major macro trends: a growing population and higher per-capita incomes. According to the latest estimates from the United Nations, in order to provide for a global population of almost 10 billion people by 2050, world agricultural production would have to increase by as much as 50% compared to 2012 levels. Meanwhile, rising affluence in the emerging markets is expected to lead to more advanced and diverse diets among a growing global middle class. For example, per-capita incomes in East and Southeast Asia are expected to grow by 60-100% by 2028, according to the Organisation for Economic Co-operation and Development (OECD). The U.S. Department of Agriculture (USDA) also expects net cash income and net farm income to stabilize in the decade ahead, recovering from a lower agricultural price environment in the recent past.

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Timberland values are also sustained by changing consumer preferences and rising affluence in the emerging markets. U.S. exports of forestry products rose by about 50% over the past decade as an expanding global middle class spends more on manufactured goods and housing. Additionally, pent-up housing demand from U.S. millennials should drive demand for timber and wood-based products in the coming years.

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Renewable energy adoption is another theme to watch over the long term, given the rapidly declining cost of renewables and increased public awareness and government/ business focus on climate change.

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Commercial Real Estate
A healthy U.S. economic backdrop — including a strong consumer sector and resilient labor market — plus continuing low real interest rates can be expected to be supportive for commercial real estate (CRE). Longer-term themes such as urbanization, logistics and e-commerce help drive demand for specific sub-sectors of CRE including industrial space and multifamily housing. Real estate capital markets continue to benefit from twin mega trends of rising wealth especially in emerging markets and the yield-starved global financial landscape which helps drive global capital into higher return vehicles supporting flows into domestic CRE.

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Private Business Outlook
The outlook for private business owners is characterized by high uncertainty given the current COVID-19 pandemic risks to their businesses, their employees, and the economy as a whole. Aggressive action by the Fed to provide liquidity and cut interest rates to support recovery has been notable and needed. And congressional action to provide supplemental unemployment benefits and special business loan programs was an essential first step in helping partially mitigate the initial impact to the economy. More transition support will likely be needed and political rhetoric suggests that work towards bipartisan compromises in that regard are well under way. Private businesses are the acknowledged backbone of the U.S. economy and engine for job growth. With an appropriate level of structural support, the entrepreneurial spirit, drive, and dedication of private business owners will allow their businesses and the broader economy to overcome the unprecedented impact of these difficult and challenging times.

Unfortunately, times like these re-emphasize that business succession - both ownership and management - remains a pressing matter for all business owners. That is a particularly acute focus for more mature owners and companies. A massive shift in ownership is anticipated for these companies over the coming decade. And if past is prologue, the majority will be sold in change-of-control transactions - with the remainder transitioning to employees or family members over time. When the time is right, our Private Business Group professionals can help provide creative thoughts, ideas, and suggestions that may help you think through the best way to accomplish your unique objectives for your business transition.  

During 2019, U.S. farmland markets were challenged by crosscurrents impacting supply and demand. Historic rainfall and flooding led to widespread planting delays for row crops, which led to concerns of significantly below-average corn and soybean production. Commodity prices rallied on fears of supply constraints while at the same time faced significant trade concerns and potential demand disruptions.

2019 U.S. production of soybean and corn ended the year at roughly 2013 and 2015 levels. The U.S.-China trade issues deepened in 2019, impacting agricultural goods in general and soybeans more particularly.

The demand side for U.S. row crops during 2019 was linked to trade issues, as farmland is typically more exposed to trade policy than other real assets. Uncertainty about U.S.-China trade and the impact on U.S. agricultural goods has taken center stage throughout the year, fueling short-run market uncertainty. In addition, the strength of the dollar negatively impacted trade. Key questions about trade with China center on whether China will buy U.S. row crops— especially soy beans— to meet both China’s own demand as well as fulfill their sovereign obligations under phase 1 of the U.S.-China trade deal.

Overall, farmland values tend to depend more on longer-term trends in the market for crops and food products. This helps explain its resilience despite the continuation of lower farm incomes largely resulting from issues of short-term supply of, and demand for, farm commodities. Throughout 2019, farmland values were supported by low interest rates and a strong buyer demand for a limited for-sale inventory. Dominant long-term market drivers remain firmly in-place, centered on increasing global food demand and decreasing arable land per capita. In the short run, encouraging recent negotiations may ease U.S.-China trade issues, perhaps stabilizing in 2020 and providing renewed optimism for both farmers and farmland investors.

U.S. corn for grain production

Chart of U.S. corn for grain production from 1999 - 2019

Source: USDA National Agricultural Statistics Service, as of 11/8/19.

Throughout 2019, farmland values were supported by low interest rates and limited for-sale inventory.

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 combatting 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. Going forward, short run economic uncertainty and an escalation of global trade tensions are key risks to watch.

Key Takeaways

  • Historic flooding had a strong impact on supply and demand, but the market held relatively steady.
  • U.S.–China trade issues have fueled short-run market uncertainty.
  • Despite lower farm incomes, farmland values were supported by low interest rates, limited supply and strong demand.
  • Corn and soybean prices have appeared to stabilize after several years of profound decline.

U.S. soybean production

Chart of U.S. soybean production from 1999 -2019

Source: USDA National Agricultural Statistics Service, as of 11/8/19.


During 2019 U.S. timberland mid- and long-term fundamentals continued to improve, but normalization was dampened again by global trade policies and disputes, a strong dollar, and the persistent supply overhang of Southeastern timber inventories. Bright spots for the year centered on continuing positive macro tailwinds— including demographics and low interest rates which drive new home sales, and repair/remodel activities. We’re beginning to see signs that the Southeast wood basin is strengthening, largely due to increased lumber-processing capacity that may eventually lead to stronger and more consistent lumber demand. 

In addition to increases in capacity stemming from new processing investment, the demand story continues with a growing market for mass timber products, especially cross-laminated timbers (CLT). Demand for such engineered forest products is consistent with growing acceptance as substitutes for steel and concrete in midrise construction — both in the U.S. and worldwide.

The supply side of the equation highlights the Southeast wood basin but also includes significant reductions in lumber coming from British Columbia (B.C.), largely resulting from the pine beetle infestation and forest fires over the last couple of years. The supply reduction in B.C. has helped trigger an increased demand for Southeast lumber and investment in Southeast processing capacity.

Against a favorable economic backdrop and macro tailwinds for timber, reassuring signs emerge heading into 2020 that momentum is building on the heels of recent encouraging trade negotiations. This could provide some market lift as constraints may ease and the U.S.-China trade roller coaster could finally stabilize in 2020. Looking forward, short run economic uncertainty or re-ignition of global trade tensions won’t necessarily change a major return driver of biological growth, which is simultaneously predictable and independent of economic conditions and pronounced uncertainties in financial markets.

Building with cross-laminated timber (CLT) Renewable, sustainable, environmentally responsible resource Costs less to produce than steel and concrete Can be up to 19½ inches thick, 18 feet wide and 98 feet long Lightweight but pound-for- pound as strong as steel Fast and easy to install

The demand story continues with a growing market for mass timber products, especially cross-laminated timbers.

Key Takeaways

  • 2020 Mid- and long-term fundamentals for timberland appear favorable.
  • Global trade policies and Southeastern supply overhang stood in the way of normalization.
  • The year brought large investments in Southeast processing capacity following reduced quantities coming from B.C. due to a beetle infestation and forest fires.
  • Negotiations show encouraging signs for market lift if U.S.–China constraints ease.

U.S. lumber production has continued to grow while the shift in timber supply has contributed to the production growth in the U.S. South.

Chart of returns on 5 year holdings of Timberland

Source: Campbell Global, as of February 2020.

Past performance is no guarantee of future results.


The mid-stream industry made great strides in 2019 increasing pipeline infrastructure and export-facility capacity, which until now has been restricting production and sales from West Texas’ Permian Basin Shale activity the past few years. Despite these takeaway-capacity improvements, we saw a decline in leasing activity during the second half of 2019 as operators sought ways to reduce expenses and evaluated success across current leasehold position.

Recently, major focus in the industry is directed toward drill-density or spacing optimization, reducing drilling and completion costs, particularly purchasing frac sand and chemicals directly from supplier and data analytics. This optimization of all components within the drilling-and-completion phase of horizontal wells has resulted in more efficient drilling technologies, increased lateral lengths, more efficient completion techniques and smarter/eco-friendly management uses for produced water resources and associated gas production. Data analysis of these growing efficiencies suggests rig count is less important, as it used to be.

U.S. Oil Rig Count – Historical & Forecast 2019 - 2021

Chart of U.S. Oil Rig Counts

Source: | Baker Hughes As of 4/6/20

This same analysis by operators has resulted in an industry shifting its focus from adding reserves to improved rates of return and profitability. Hence, we can potentially see a continuance of decreasing rig and permit counts, but more focus on exploiting current core leasehold acreage as operators high-grade their assets. While acquisition and divestiture (A&D) activity has exhibited a stop-and-go approach in 2019, A&D, along with acreage acquisitions, are expected to pick up in the first half of 2020, with fresh budgets in hand and continued interest by private equity firms to consolidate their own exploration companies, since the build-and-flip model has turned somewhat sour lately.

Turning to other energy resource sectors, such as wind and solar, some savvy surface owners, even fee owners, who also own oil and gas mineral rights, are looking for alternative means, such as wind and solar to create, or supplement, their income stream. This is of particular interest to surface owners with less attractive lands; particularly those which do not provide any income stream generated by oil and gas, ranching and/or agriculture activities. Surface owners’ interest in leasing their lands to renewable energy companies is growing; especially those seeking to build wind turbine or solar panel farms in generating and supplying alternative power needs for nearby rural communities.

Key Takeaways

  • Despite capacity improvements, leasing activity was down during the second half of the year as operators tried to reduce expenses, but A&D and acreage acquisitions are expected to pick up in the first half of 2020.
  • Industry-wide focus on optimization of all components of the drilling-and-completion phase has resulted in improved technology and more eco-friendly processes.
  • Owners of less attractive lands are turning to other energy resource sectors like wind and solar.

Commercial Real Estate

During 2019 the U.S. commercial real estate (CRE) markets continued their march through the mature phase of the current recovery cycle, remaining in good shape throughout the year. Vacancy rates are low with growth in new construction generally consistent with demand across most sectors, although at this point not all sectors and markets are synchronized. 

With the exception of certain retail classifications, the demand for other major property groups (multifamily, industrial, office) exhibited continued signs of durability, largely based on 2019 economic growth, a strong job market and healthy consumer spending. In addition, low interest rates (year-end 10-year Treasury yield under 2% with current levels dipping below 1.1% and at historic lows), along with solid demand for U.S. real estate continued to support market activity during 2019 and will help drive continued buoyancy into 2020.

On the supply side, while there were pockets of market softness — especially in retail — vacancies hovered around or below longterm averages. The industrial sector benefits from e-commerce tailwinds as reflected in vacancy rates generally lower than longterm averages, and the potential for modestly lower cap rates going into 2020. New construction is back and adding to supply, but continuing lender discipline, along with rising development costs, may help keep supply largely in balance going forward.

Against a favorable macro backdrop of economic growth, low interest rates, reasonable property fundamentals and capital markets with ample supply of debt and equity but not over-extending, property valuations on balance are considered relatively fair with go-forward expectations of rent growth consistent with inflation (for most sectors) and potential investment returns tilted toward income versus appreciation. As a potential offset to heightened volatility due to external economic and market shocks, CRE leasing structures — medium- and long-dated leases with built-in escalators — help smooth cash flows and the profile of potential returns generated by CRE investments.

Vacancy rates by property type

Chart of Vacancy rates by property type

Source: National Council of Real Estate Investment Fiduciaries (NCREIF) Trends Report and National Property Index (NPI), as of 12/31/19.

Vacancy rates were low with growth in new construction generally consistent with demand across most sectors.

Key Takeaways

  • The strong employment market and consumer spending in 2019 along with low interest rates, resulted in strong demand in most property groups.
  • Retail showed market softness with vacancies hovering around or below long-term averages.
  • Property valuations were fair with expectations of rent growth consistent with inflation.

CRE historically provided investors strong returns over the long run, including during periods of recession when values reduce.

Chart of commercial real estate returns from 1991 -2019

Source: NCREIF Trends Report and NPI, as of 12/31/19.

Past performance is no guarantee of future results.

The Specialty Asset Management Team can offer the strategic insight and specialized expertise required to manage and maximize the potential of these investments. Today, the team manages over 84,000 client assets with a total asset value of $11.3 billion. Our more than 200 employees across 38 cities nationwide give us a broad geographic scope and the experienced “boots on the ground” approach to help meet our clients’ needs.*

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