Will Real Estate Protect Your Portfolio if the AI Bubble Bursts?

0:00Telis Demos: Tomorrow's opportunities start by seeing beyond the surface. Global X ETFs combine deep research and global expertise to uncover the forces shaping markets. Explore ETFs for investors who lead with conviction at GlobalXETFs.com. Hi, Miriam. Hi, Telis. This week, we're going to have a conversation about real estate. And it's a conversation that we've been meaning to have on this show for a while because we've asked you, the audience, how you invest and the kinds of things you invest in. You know, do you invest in individual stocks? Do you mostly buy ETFs? And one answer that we got quite a bit that surprised us to some extent was real estate.

0:37Telis Demos: People want to hear about real estate. Yeah, I think a lot of people invest directly in real estate. I mean, many of us own homes, so that's many of our biggest investments. We also might invest in multifamily housing syndicates or, you know, commercial real estate investments. But others want to have real estate as a component of their stock portfolio. And I think that's because it's often seen as an inflation hedge, which is important right now, and sort of another way to play that halo trade that Josh Brown talked about on this show. Heavy asset, low obsolescence. Exactly. The not AI stuff in your portfolio.

1:15Telis Demos: It's a physical thing, and it's good to have some of that in your portfolio. And the way that people primarily do that, I think, is through what are called REITs, Real Estate Investment Trusts. These are companies that own properties. They might own offices or malls or data centers. And they're set up as these REITs because what they do is they get a tax break if they pass along most of their income to their investors, meaning they pay dividends. They pay usually some of the highest dividends in the market. So their value goes up and down based on the value of their properties, but their value also goes up and down based on what they're paying out.

1:54Telis Demos: So that's a primary vehicle for people to do real estate investing in the market. Yes. And there's also a REIT ETF that you can own if you just want exposure to a broad basket of REITs. But there's a ton of different flavors of REITs. Like I said, many different property types. And so our guest helps walk us through not just the common drivers of real estate investing, which, by the way, one of the biggest ones is interest rates, topic in the news. But then, you know, the kind of the individual economic forces that might be impacting data centers, senior centers, offices, things like that. But before we get to that, we have to talk about the thing that's been dominating the conversation apart from interest rates.

2:35Telis Demos: I mean, all my conversations, not just my work conversations, by the way. Exactly. And that is AI and the chance that it might destroy humanity. Yes. It's obviously been a topic in the news after an anthropic researcher said that he had left his job because he had fears that the creation of the latest AI models was the safety measures were not good enough. And that they were moving too quickly. And that they were moving too quickly. That unleashed a much broader conversation about, you know, some people's views that there are potentially human extinction risks on the table when we talk about, you know, could model development essentially run away from the companies doing it?

3:16Telis Demos: And some of the major ones being Anthropic, OpenAI, and others. And others have said, you know, maybe this is a lot of hype. Some people are really cynical about this because they say maybe this is just an excuse because they're not ready for an IPO. Maybe they need to show more profitability in the short term. And so it's in their interest to signal to one another, let's slow down. Let's try to, you know, not be pushing this so quickly and be spending on the next frontier. Yeah, it's a lot to think about. And some of those questions are beyond the scope of this show. We certainly can't answer them.

3:54Telis Demos: Sort through. But looking at it as we can here through sort of a markets and investing lens, the news that I think that has come out of this is that companies like Anthropic and OpenAI are now talking about, do we need to have a sort of intentional slowdown of some of that model development. And then the question is, what does that potentially mean for, as you mentioned, their own IPOs, but also for AI investments across the market? And to be honest, the stock market reaction was not enormous. You did see some correction in chip stocks in the sort of the days that followed that conversation. And then, interestingly, you saw a rally in other companies like software companies that had been considered at risk of AI disruption.

4:40Telis Demos: But none of those moves were outsized. And I think by the end of this past week, some of those stock market moves were overshadowed by what was happening at the Federal Reserve. That's right. The Fed hiked interest rates by a quarter point. Which was not a surprise. Which was not a surprise. In fact, it was already priced in in many ways. But it is probably not the last interest rate hike of this cycle. Fed officials have already, through their projections, penciled in another rate increase. I think things that were interesting about the decision that people are talking about, one is that it was unanimous.

5:15Telis Demos: It was 12-0. That was sort of interesting. You know, some of the people who are more geeked out in these things are looking at, well, you know, the Fed kind of said that some of the further out projections of what interest rates are were kind of raised a little bit. The market reaction was a little bit all over the place in the immediate aftermath. So I would say like right when the decision hit, people bought longer term treasury bonds. So 10-year yields fell a little bit. As Kevin Warsh talked, the market felt like what he was saying to reporters was hawkish, that he was like really, you know, trying to bolster his inflation fighting credentials.

5:54Telis Demos: That pushed 10-year yields up a little bit. But then by the next morning, they had started to decline a little bit. I mean, it seems like the market is kind of glad that the Fed reacted because if the Fed hadn't moved, there would have been this continued fear that the Fed does not know how to deal with this situation or isn't taking it seriously or isn't, you know, combating inflation in the way that people wanted. And maybe even the continued fear that the Fed is too political because, as we know, Donald Trump has pushed for lower interest rates. And but like predecessors before him, you know, like Alan Greenspan, who similarly was appointed by president that wanted, you know, interest rates to go down, as most presidents do.

6:38Telis Demos: His very first decision was was a rate hike. And Kevin Warsh, who we've talked about on this show, wants to kind of be kind of Greenspan-esque. You know, he wants to say less and not, you know, kind of roadmap for the market what the Fed is going to do. And so, you know, if Greenspan's first move was a hike, well, maybe it made sense that Warsh's first move ultimately. Maybe so. But I think the thing that the Fed and probably everyone has to keep looking at is the price at the pump. I mean, oil prices are high and gas prices are high. And this matters to Americans. It's just always been a very big issue, especially heading into the midterms.

7:17And the Fed has to take that seriously.

7:19Telis Demos: Totally agree. And I think, you know, we were just talking about this earlier today with, you know, I was talking about it with Aaron Beck and some other colleagues. that the closest correlation right now seems to be between bond yields and oil prices. So really, you know, whether crude, you know, stays above 100, gets back down, goes up further, that might be the most important variable in the near term. But I do want to call out, again, that the move thus far as of when I'm talking was that the Fed did hike, but longer term bond yields came down a little bit. So that's just a reminder, too, to investors that things don't always move in a straight line, as you might expect them to.

7:57Telis Demos: I mean, I think one reason that yields on bonds are up is because the Fed is going to be hiking. But the question is whether or not those Fed hikes will achieve their goal of slowing the economy at some point, which then helps restrain prices. And then ultimately, that means that interest rates can be lower in the future. That's in some ways sort of the goal. But of course, you don't want to overshoot it and cause a recession to head. So it's a tricky job being at the Federal Reserve. It is. But speaking of longer-term bond yields, Oh, great transition. That is a key input for real estate. Yes.

8:32That is basically what determines the interest rate in borrowing for real estate projects.

8:38Telis Demos: Yeah. So whatever the Fed was going to do at this meeting already, because 10-year yields have gone up quite a bit, they've crossed that 5 % threshold recently, that's what really matters for real estate investors. Yeah. And we're going to talk about why this time around might be a little bit different than the last time the Fed hiked interest rates and whether real estate is truly an anti-AI or a defensive move for investors. We had a great conversation about that with our guest, who is Jeffries equity analyst John Peterson. Jeffries covers a range of different kinds of flavors of real estate, investment trusts, REITs, as we discussed.

9:15Telis Demos: And we got into drivers of many of those different sectors. We had a really, really good, really detailed conversation on this one. That's coming up in a bit.

9:28Telis Demos: What connects GlobalX ETFs with the advisors and investors who choose us? Conviction. The belief that vision returns value and innovation yields opportunity. Combining insights both local and global, we look beyond obvious trends to uncover the opportunities shaping tomorrow. Explore our funds at GlobalXETFs.com. Global X. Beyond Ordinary ETFs.

10:02Thanks so much for joining us, John. Thanks for having me. Happy to be here. So the last time the Federal Reserve raised interest rates back in 2022, the real estate market cratered. It was a huge disruption to that industry, and it kind of seems like it never really recovered. Are we poised to have that same scenario here with the Fed's upward trajectory of rates? Yeah, it's an interesting question. Back in 2022, we had actually come off a year that was incredibly strong for the REIT sector. So during the pandemic, maybe you go back a couple of years before that, in 2020, REITs had gotten hit particularly hard with retail stores being closed, offices being closed.

10:442021 was the year of huge recovery. There was inflation in the economy. Rates were pretty low. people were feeling really good about the REIT sector. And then the Fed came in and raised rates and it kind of killed the momentum. And we've underperformed as a sector for the last four years in a row. As interest rates have risen, that's really kind of been a bit of the headwind. What I'd say, though, is the REIT sector has underperformed the last four years in a row. I don't think we're, as a sector, very overvalued at these levels. And so to a degree, I would say higher interest rates or kind of higher for longer interest rates have been the base case investor scenario in the REIT sector for the past few years.

11:21So I don't think we'll see a repeat of what we saw in 2022.

11:25Telis Demos: Can you give us a little just kind of explainer as to what the relationship is between interest rates and real estate? Yeah, sure. In the REIT sector, people are looking at the long-term interest rate. Generally with real estate, the 10-year treasury is what we're looking at is kind of the most important metric. And the reason why is real estate tends to be financed on a long-term basis with longer-term debt. So there isn't a lot of exposure to short-term interest rates for the REIT sector. The other thing is we often use a term called a cap rate on transactions. That's the NOI on a property divided by the transaction value.

12:01Telis Demos: NOI being the income generator. Net operating income, yeah, the income generator. And if interest rates go up, then your cost of debt on financing that building would go up. And therefore, if you're going to buy the building, you would want to buy it at a higher cap rate, which is going to bring values down. Think of it very bond-like, right? Cap rates go up, values go down. Same with bonds and yields. And what's happened to long-term interest rates over the last couple months? It's been kind of a straight upward trajectory, particularly in the past few weeks. Now that we're around 5%, for the last couple of years, we've kind of settled out in the mid-4s.

12:36And I think people have got to a point where they're kind of comfortable that maybe mid fours is where we're going to be now that we're hitting five percent. I don't know if that creates a new sort of, you know, mental block for the community that drives a little bit of underperformance here in the near term. This brings me to another question that I have, which is where were we in the last recovery cycle before interest rates started to rise? So when interest rates started to rise, you know, one thing that happens in the real estate world is it starts to become difficult to start new construction projects.

13:07You know, one thing that always kills real estate is supply growth. If there's a lot of supply growth that in that supply growth outweighs demand, then rents tend to decline and things can be kind of weak. We sort of went through a softening of the cycle 2022, 2023, 2024 on higher supply. But now we've gotten to the other side where supply growth is very limited because it just hasn't made economic sense to start new real estate projects over the past, you know, over the past few years. So and by the way, supply in this context means like new buildings, new construction. Yes. And And so in some ways, I would say the sector is in a healthy position because new supply growth is fairly muted right now.

13:45So if we do have higher interest rates or an economic slowdown or all of that, at least there's that benefit that's helping out the real estate sector right now. So across the entire REIT sector, our expectation for earnings growth over the next few years is about 7 % a year. If you go back, the long-term average in the REIT sector is about 4 % to 5%. So we are seeing elevated earnings growth right now that can offset the higher interest costs. So, I mean, we know that interest is the key input across all the REITs and across all of real estate, that interest rates are the key input. Right. But obviously not every sector is created equal.

14:22Which sectors have the wind at their backs right now? Yeah. So right now we're definitely in a growth economy. Right. I think investors are looking for growth stocks in the REIT sector. we absolutely have sectors that are growing fast. So the one that's growing the fastest right now is senior housing, which which may surprise people and may surprise people may not. But the if you look at the demographics in the United States, I think everybody realizes the baby boomers are getting older. This is the year when the first baby boomers are turning 80. That 80 plus demographic is what we follow for senior housing.

14:52And that's when people tend to move into assisted living. And so the expectation for population growth of that demographic is expected to be above 5 % for the next 10 years. The long-term average was about 2%. Through the pandemic, again, coming back to new supply growth, we stopped building new senior housing. We really, yeah, it really kind of came to a standstill.

15:14Telis Demos: See, that's shocking because everyone knew that this, you know, silver tsunami was coming. You'd think everybody would have been building like crazy. So back in the 20-teens, we went through a period where there was a lot of new construction of senior housing because everybody knew the demographics, right? Everybody can go to the census website and look at the demographics. It's not a secret. Not a secret at all. And so actually coming into the pandemic, the sector was a bit oversupplied. A lot of private equity was out financing development of new senior housing facilities. Then the pandemic happened.

15:42Of course, yeah. Right? And for obvious reasons that kind of - It was pretty bad for senior housing. I mean, like - To say the least. To say the least. And now we're in an environment where everybody knows, people that are in the industry know that the fundamentals are getting better, but there still is a gap between where rents are and where they need to be to justify new construction. In the industry, we call it replacement rents, where the rents that they need to be to require new buildings to be built. So there's still kind of a catch up there. But the companies like the publicly traded companies like Welltower and Ventos that invest in these senior housing facilities, they're seeing same property net operating income growth in the 15 to 20 percent range annually right now, which is an exceptionally high level for real estate, which is historically a kind of a more boring sector, we get excited about high single digits earnings growth, and they're doing high teens.

16:32Telis Demos: So I'm glad we brought up the pandemic because it seems like that really is what, in my mind, casts a huge shadow over commercial real estate, be it offices, right? Everybody was working remotely, so you don't need offices anymore. Malls, right? And nobody wanted to go to the mall anymore, so everything then went to e-commerce, which meant warehouses, logistics. Logistics, yeah. Are we still living in that post-pandemic era in all those trends or have things evolved a lot since then? You're right. It's shaped a lot of the last six years. I still think we are feeling some of the lingering effects.

17:10So to give you some examples, so I just walked through senior housing, but let's maybe talk about the logistics or the warehouse sector for a minute. That sector did exceptionally well through the pandemic. All of us were at home and we were all shopping online. We ordered so much stuff from Amazon during those years. Exactly. And so instead of going to the store, the store was our computer and all those goods needed to be stored in warehouses. You know, we also had, you know, various, I think, supply chain issues and things like that that were requiring a lot of investment in the logistics and kind of logistics real estate.

17:43So rents increased substantially in 2021 and 2022. They sort of peaked out in 2022 as new supplies started to come online because people saw how strong fundamentals were. And we've kind of gone through a period of correction in rents. In the logistics sector, you typically sign five-year leases. So if rents were really strong in 2021 and 2022, maybe you're getting ahead of me, but you add five to those numbers. You know, over the next few years, we're actually going to be resetting some of those rents. So we expect earnings growth to still be strong. There still are some tailwinds that is keeping companies like Prologis and Stag Industrial going right now.

18:19But it's going to start to moderate over the next few years as they start to roll those rents over.

18:23Telis Demos: You've talked about in your research, actually, that some of what's going on with data centers, which are a distinct sector from – and which we'll get to – distinct sector from logistics is actually benefiting logistics to some extent, right? That's exactly right. It sort of came out of nowhere. I suppose as the data center analyst, I should have seen it coming. But in the first half of this year, there was a huge wave of demand for new logistics real estate from – related to data center supply chain. So you can think about companies like Schneider Electric that needed more. They essentially lease warehouse space to do manufacturing of switchgear equipment.

18:55They had they signed a large lease in Nashville to do that this year. You've got companies like Corning that do like fiber optic cabling that need places to store that. And then you have the hyperscalers themselves that have been looking for logistics capacity near their big campuses where they're building data centers because they need places to stage equipment. make sure the GPUs are all ready to go before they actually take them to the data center and plug in. So not everything in logistics is tied to e-commerce. There's a lot of other demand. It is not. And I'd say the other thing that we've seen over the past few years is there's been a lot of investment just generally in manufacturing in the U.S.

19:29and certain sectors, started with some of the stimulus bills in the Biden administration, still continues through today. And so we actually saw demand shift away from maybe the big population center coastal markets where e-commerce was driving demand and more to some of those middle-of-the-country markets where you have seen more investment in manufacturing. So we had a great story in the Wall Street Journal this past week about how malls are actually making a surprising comeback. What is going on? Why is it that all of a sudden malls are seeing this rebirth? Yeah, so there's been no new supply growth.

20:05I say a couple things, and I keep coming back to supply and real estate. That matters so much. But in the In the mall sector, you know, seven, eight years ago, we sort of woke up and realized that we had more department stores that we needed. We had more retail square footage than we needed. And we stopped building new malls. Like you might look around. Anybody who's listening to this podcast in the United States, like there's probably no new mall that's been built near you. There might be a mall that closed near you. Exactly. Right. The mall that I worked at, I worked at Sears when I was a teenager in Colorado.

20:34The mall that I worked at is no longer there. I believe there's a Costco and maybe some condos on top of it.

20:38Telis Demos: I mean, dead malls are like an aesthetic. Yeah. I see people who like sneak in and take these like, you know, weird videos. What, you know. Yeah, there were some. Part of the culture almost. There were some smart, you know, private investors out there that raised funds and went and bought out a lot of these old malls, milked them for cash flow for a number of years and then tore them down and redeveloped them into something else. And so what you're left, what we've been left with is the class A malls that, you know, have the tenants that people want to go see. We've also reimagined what to do with a lot of those anchor box spaces and new retail tenants are always coming along to take space.

21:15And there's always retailers out there that are growing. And in this environment, they're running out of places to grow into and they're needing to pay higher rents and it's driving values higher. And what are the big mall REITs? So Simon Property Group is the very large one. They own a lot of class A malls in the country. They really dominate the sector. You've also got companies like Mace Rich Properties, which also owns malls. Those are the two big ones. All right.

21:41Telis Demos: All this talk of malls has made me realize I've got to do a couple of returns. So we're going to take a quick break and then we're going to continue our conversation with John Peterson about real estate.

22:02Welcome back. I know this is a topic that's near and dear to your heart. But TELUS and I were having this debate. When you invest in a data center REIT, are you really investing in the data centers that we hear about that are being built by the AI hyperscaler?

22:19Telis Demos: You know, the Louisiana data center is as big as Manhattan. You know, all these like, you know, exciting new projects. That's distinct from what is in the publicly traded data center REIT world, right? Right. Yeah, that's exactly right. Right. If you're looking for a gigawatt scale data center that's training the next frontier model, that's probably happening in Louisiana or North Dakota or West Texas or some of those kind of places. Far away from a city center. Exactly. But think about it this way. When you go on to ChatGPT and you prompt it and you ask it a question and you send it through, it has to go through the Internet to get to that data center in North Dakota.

22:55That's going to take you through the major data center markets in the United States. that's where Digital Realty and Equinix primarily own their data centers. Northern Virginia. Northern Virginia is a huge data center hub. Atlanta, Chicago, Dallas, Phoenix, Portland, Oregon, Silicon Valley to a degree. Those are the major data center markets in the U.S., and that's where you're going to find both of those companies. It's also where you're going to find most of the enterprise data. That's where the cloud availability zones from AWS and Microsoft Azure, that's where they are all located. And that's still important, even though we have these, you know, LLMs that have taken over the conversation.

23:34Yeah. And I think it's a good point because we're getting to the somewhat more mature phase in AI where there's a lot more enterprise adoption. And enterprise adoption means using these AI models to learn from the data that the enterprise has. Right. The data the enterprise has is not in Louisiana. Right. It's in northern Virginia. It's in kind of these major markets. So as we move, you know, training will always exist to some degree. The frontier models will continue to push the frontier. But inference is going to become a lot more important. And as more tokens are used for inference instead of training, that's going to drive, I think, more of this demand into the major tier one data center markets because that's where the enterprise data is.

24:14That's where the people are. I think a good way to think about this, for those of us that are old enough for dial-up internet or the early days of broadband, like when we used to wait for websites to load, we went through this period of time where we became really impatient. If a website took a long time to load, we would just go to a different website, right? It's why the Wall Street Journal website loads really quickly because you guys invest a lot in having good infrastructure so that people can get on the website quickly, right? We've gone through that whole phase, and now the internet works pretty quickly.

24:42AI, I think everybody on this call realizes it's kind of slow sometimes. Yeah. Right? And we're going to get to a point that if Gemini is running faster than ChatGPT, people are going to get annoyed with ChatGPT and they're going to start using Gemini. Right? And if that starts to slow down, maybe they'll go try to use Anthropic. So you need these more proximate data centers to enable that. But can you build more of those? I mean, it seems like these key data center markets that you described are very saturated right now, and it's pretty hard to build another data center in Northern Virginia, for example.

25:15So a couple points on that. One is you are absolutely right. It's very difficult to build a new data center, almost impossible in a place like Northern Virginia. Companies like Digital Realty, though, have large land banks in those markets. Meaning they've already bought land years ago. Years ago they bought land. that years ago when they bought it, I criticized them for overpaying for that land. And today you'd look at it and you'd say, oh, that's a bargain for how much you'd have to buy land in a place like Northern Virginia today. So, you know, as we get more transmission capacity online in places like Northern Virginia and Atlanta and Dallas, it unlocks development potential for companies like Digital Realty and for Equinix.

25:50That's one point. The other point is kind of the opposite where, well, if nobody can build new data centers, then that just makes the value of existing data centers that much higher. And the rents they can charge that much more lucrative. Exactly. So companies like Digital Realty, we think, are actually very well positioned over the next few years to push rents quite a bit higher on the leases that are coming due. They have a lot of leases with various social media and cloud companies that they signed at the bottom of the market, which is kind of like the late 20-teens that are going to come up for renewal at the end of the decade and have a pretty strong ability to push rents on those.

26:25So their renewals are going to be a positive thing on the logistics. It's going to be a lot like what the logistics sector went through during those pandemic years of kind of marking everything to market.

26:35Telis Demos: But remember, as we're discussing now, there's the other side of that as well someday, right? Like all those logistics contracts that you couldn't sign fast enough in 2020 or 2021. Now we're here in 2016. You know, some of those might. So maybe there's that cycle in AI as well. It's a great point. And one thing I would point out is a lot of the leases that are rolling off today that were signed with hyperscalers were seven-year leases. So you can have to go back seven years ago. Today, hyperscalers are signing leases that are more like 10, 15, even 20 years. So you're absolutely right. There is going to be a day of reckoning where the leases that are signed today are going to be marked back down to market, which will probably be lower in the future.

27:12But that's 15 years from now. I don't know if we're still going to be. Do our DCF models even go that far? I don't know what I'm having for lunch today. I might be living in a well-tower senior living facility at that point.

27:22Telis Demos: So what's happened to stocks of data centers, you know, alongside the huge AI rally? Have they gone up the same, just as much, less? You know, what's been the trend? Over the past few years, the data center read sector has done very well. Early on, you know, ChatGPT came out at the end of 2022. 2023 and 2024 were very good years for the data center reads because it was one of the few places where you could express optimism around the AI infrastructure trade. It sort of slowed down over the last couple of years. Somewhat surprising to me, but you've seen a lot of new entrants in the data center world.

27:55You've seen companies that are building these AI data centers specifically. I cover some of these companies that used to do Bitcoin mining that have pivoted. And the investor market has become, the stock market has become very excited about these companies that are totally reinventing themselves and are putting themselves on a path to trade at a much more exciting multiple. What are some of these new entrants? So companies like Hut8 or Core Scientific or TerraWolf, these companies were all Bitcoin miners in the past and are kind of pivoting entirely away from that business. But they are not organized as REITs.

28:28Telis Demos: They're not REITs. They're not REITs. So as we explained before, you know, REITs have certain ways that they do business. These are just regular companies, right? Correct. The Hut8s and TerraWolfs. That is correct. Does that mean that they trade differently? They definitely trade differently. Different investor bases? They're very volatile. there's a lot of liquidity in the stock in these stocks. They trade a lot. There's a lot of retail investment. There's a lot of, you know, TMT investors, a lot of the utilities investors are involved with these stocks. So if I were to talk to a re-dedicated investor, they're very excited about digital reality and Equinix.

29:02They underwrite the business. They say this is going from a high single digit earnings growth business to a kind of low to mid-teens earning growth business. And in my world, that's super exciting for a lot of investors, There's a more broader generalist crowd that's maybe also investing in, you know, NVIDIA and, you know, some of these other AI infrastructure trades like Vertiv or companies like that. You know, they're looking for much stronger returns. And so it's kind of hard to get people to focus on the data center REITs because there's kind of these these sexier data center companies that are out there.

29:35I think that sort of gets to a really big question that I have, which is are REITs a defensive play? Because we've talked on this podcast about how heavy asset companies are a good defensive play against a world made out of chips and bits.

29:56Telis Demos: And traditionally an inflationary world, right? Exactly. Land, property, those are inflation. Yeah. Are they also caught up in this AI thing? Like, are they actually as defensive as people want them to be? So I'll give you some data points. So the REIT sector has underperformed for four years in a row as interest rates have gone up. Part of its interest rates have gone up, but I also think the broader market has just been really focused on the tech. Like there's just really high growth from the tech industry. There's a parallel to this in the past. In the dot-com, you know, run up, REITs underperformed.

30:29Once the dot-com bubble burst, REITs outperformed the broader market on a total return basis for seven straight years in a row because everybody kind of stepped back from tech for a long period of time. And real estate felt like the safe place to be. I think there is another side to this, that this AI infrastructure, this AI trade won't last forever. And we still see it like week to week when we have periods where the AI trade is pulling back. REITs will tend to outperform. I think the first half of the year, the market was becoming a little bit more cautious on AI and REITs were outperforming up until about a month or so ago.

31:04When the interest rate news started kind of turning in the wrong direction for REITs. Exactly. So I do think like when we get to the other side of this and, you know, if we are in an AI bubble and it starts to burst, you know, real estate probably is a healthy place to be. And a couple of things that I would point out, you know, I was kind of talking about that seven years of outperformance by dot-com. Anybody who's paying attention to years is like, well, after that came the GFC. And real estate was a big part of that. Balance sheets were over levered at that time period. Debt maturities were not stacked correctly.

31:37REITs are at their lowest leverage levels that they've been in a very long time.

31:40Telis Demos: Meaning like they haven't borrowed as much as they haven't borrowed. Nearly as much. So GFC, meaning the 2008 financial crisis, they had been borrowing a lot more back then. Today it's different. Yeah, if we had another recession, I think that REITs are very well positioned here. And so when you talk about the performance of a REIT, I think that there are investors who are buying them primarily for the dividends, for the income that they're getting. They're not as concerned about whether or not the stock is going up or down. How does that element of REITs – how is that done and what's your sort of outlook for that?

32:08Yeah, so dividends today are fairly well covered by cash flow. The average payout – or the average dividend yield of a REIT today is about 3.5%. That is, I think, relative to interest rates, a bit lower than maybe it should be. But as I mentioned before, earnings growth is quite a bit higher. I found in the REIT sector, like, sure, people definitely invest in them for the dividend. But investors tend to be a lot more focused on the growth potential of the stock. And over time, what you hope is you buy a REIT today at a 3.5 % dividend yield. Hopefully, it has pretty strong growth over the next, you know, 5, 10 years.

32:41And that 3.5 % yield can turn into a 7 % yield over time as they increase dividends.

32:46Telis Demos: So it's kind of a hybrid then where you're getting something that's a bit bond-like from the dividend. And you're saying that when they have strong cash buffers, it means that things would have to go very, very bad for them to cut that. But there's this sort of equity element where the value of the REIT could still go up. And then that adds up to your total return, the dividend you're getting plus the stock has gone up. Exactly. I think, like I said, we're expecting about 7 % earnings growth from the REIT sector over the next few years. So if you can get 7 % growth and a 3.5 % dividend yield, that should be about a 10.5 % total return, assuming multiples stay the same, which I think for most investors should be a pretty healthy level, long-term average.

33:26Long-term, that's ahead of where the S &P 500 is returned. So many of our listeners invest using index funds and might not be as, you know, into buying individual stocks. With the REIT sector, is it more useful, though, to like get down to the subsector level and kind of pick which subsectors you think are going to outperform versus just buying a REIT index and having that in your portfolio?

33:51Telis Demos: That's a great question because I feel like, well, obviously they all have the, they own a property. Interest rates matter to all these stocks. We're talking about things that have totally different economic drivers, senior living, data centers. I mean, interest rates are like the thing that ties them. But otherwise, they're not really that related. I mean, my title is I am a real estate analyst. But I wake up in the morning and I talk to people about retail trends. And then I talk to people about senior demographics. And then I talk to people about the data center industry. And I'm just bouncing back and forth between all sorts of different sectors.

34:19So to the premise of your question, if you spend time in the REIT sector and pay attention to which subsectors are seeing the best earnings growth, you're going to get better returns over time, likely. So, you know, sectors today that have done very well over the past few years, we talked about data centers, senior housing has done very well, logistics has done very well. Like if you're keyed into those trends, you know, maybe one thing I would say is being a stock picker within those sectors can maybe be, maybe that's a little more effort than it's worth. But if you want to notice the trend of like, oh, logistics seems to be doing well right now, why don't I buy a basket of those?

34:52So just buy all the logistics or something. Yeah. Yeah. That's a good strategy, it seems like.

34:57Telis Demos: Well, John, this has been a great conversation. Thanks so much for going through this. And like we said, you know, real estate is a big category, but there's a lot going on in there. And it was great to talk through all that stuff. Yeah. This was fun. Thanks, Telus. Thanks, Maren.

35:11And that's everything you need to know to take on your week. The show is produced by Alexis Moore and Michael LaValle. Michael LaValle is our sound designer. He also wrote our theme music. Aisha Al-Muslim is our development producer. Chris Zinsley is our deputy editor. Lita Al-Mulad is our senior director of shows. And Samantha Hennig is the Wall Street Journal's head of multimedia. For even more, head to WSJ.com. I'm Miriam Gottfried.

35:35Telis Demos: And I'm Telus Demos. Until next time. That's not been this. Wow, here's a reason to buy Office, you know, REITs because they're all going to become apartments. I think it works in some markets. I think places like New York and San Francisco, it can work. This podcast studio could not be a bedroom. It does not have a window to the outside. If you think creatively, we're in New York. I think a landlord could charge it. I'll figure it.

36:04Telis Demos: What connects Global X ETFs with the advisors and investors who choose us? conviction the belief that vision returns value and innovation yields opportunity combining insights both local and global we look beyond obvious trends to uncover the opportunities shaping tomorrow explore our funds at globalxetfs.com globalx beyond ordinary ETFs