Motley Fool Founders Talk CRE Investment, Retail Apocalypse And The Fate Of Capitalism

Tom and David Gardner are quick to tell you that investing in commercial real estate isn’t their area of expertise.

But that doesn’t mean that the two brothers, who have been dispensing stock market investment recommendations as The Motley Fool since 1993, don’t have a few thoughts on what parts of the CRE market look ripe for a long-term hold, and which ones you’re better off avoiding.

On Wednesday’s Walker & Dunlop Walker Webcast, the Gardner brothers examined the state of the equity markets for big-name companies like Amazon and Tesla and weighed parallels with previous bubbles and recessions. They also voiced their thoughts on how consumer trends can indicate smart investments both in and out of the real estate market.

“If you can study the freedoms or benefits that have emerged in this otherwise horrible scenario, and determine how they're going to change behavior going forward, that will point to changes in how we use commercial space,” said Tom Gardner, The Motley Fool’s CEO.

This year has not been kind to the real estate equity markets. David Gardner estimated that overall, real estate has taken a 14% hit to valuations, and there are still numerous REIT stocks and other publicly traded ownership groups that The Motley Fool’s real estate analysts suggest avoiding, including mortgage REITs and large retail owners, whose portfolios are under a great deal of stress at the moment.

However, David Gardner singled out Store Capital, a Scottsdale, Arizona-based REIT as one such example. Though the value of its stock has dipped 25% in 2020, the company’s collections are high and it has less exposure than many of its competitors to coronavirus-sensitive industries like hospitality and retail. That recipe could make its stock — and others like it — attractive buys for those who believe in real estate long-term. 

The brothers were fairly cheery in their outlook for hospitality and office REITs, saying those investments would be fairly safe long-term, even as travel remains depressed and as companies rethink their physical footprints. However, the two did mention that The Motley Fool itself, which employs over 500 people, may be shifting its offices to a more regional model. 

In some cases, understanding distress in the world of real estate can inform investments in equity markets. The losses in brick-and-mortar stores have coincided with the rise of online alternatives, benefiting e-commerce platforms like Shopify, which has a stock price that has almost tripled since the middle of March. 

When asked to pick stocks to buy right now, both Tom and David focused on technologies, including Slack, Zoom, information security provider Zscaler, online marketplace Fiverr and video game studio Take-Two Interactive.

But David also included athletic wear retailer Lululemon on his list, explaining that the brand’s fiercely loyal customer base means its many brick-and-mortar locations are not going to waste even during a pandemic.

“It’s a brilliantly managed brand, and the people who love it really love it,” David said. “It’s also a female-focused business. With Wall Street being so dominated by men, stocks like Lululemon and Etsy, which are category leaders and huge winners, sometimes get overlooked.”

Though the Gardner brothers by nature tend to buy stocks to hold them for the long-term, Walker & Dunlop CEO Willy Walker questioned them on their strategy for selling equity holdings, citing companies like GE and Alcoa, which were spectacularly successful between 1989 and 2000 but have severely underperformed the market since. 

“The important thing when figuring out if a company is still relevant is whether it’s innovating,” David said. “The companies that are innovating and rolling with the punches are the ones that stay relevant.”

That philosophy should likely apply to real estate stocks as well, the brothers agreed, pointing out that more data-driven real estate companies will be the ones to benefit most from any coronavirus recovery. While equity markets have been the engine for the unprecedented creation of wealth over the last 50 years, Tom and David identified threats to capitalism on two different fronts.

First, there is a younger generation that is disillusioned by a capitalist system, and which may take the innovations that capitalism has created, like the internet and the smartphone, for granted. But there is also a countervailing threat of private enterprises growing more and more isolated and divorced from the well-being of everyday Americans. 

“Capitalism wins when more people feel that they benefit from it,” Tom Gardner said. “The more that people see scalping and people who say, ‘I got my commission, now I'm going to my gated community because I made what I need to make,’ the less chance there is for a healthier form of capitalism to emerge."

"Capitalism is going to win if it gets healthier every decade in our lives," he said. "It's something that we all have a stake in.”

On Oct. 7, Walker will host Mark Zandi, chief economist at Moody's Analytics, to talk about the macroeconomic factors at play as we head into 2021. Register here for the event.

This feature was produced in collaboration between the Bisnow Branded Content Studio and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.