Earlier this month, we finally saw a jobs report that wasn’t horrendous. We created over half a million jobs and are slowly but surely staggering our way towards a full economic recovery from the ravages of the COVID pandemic.
Certain aspects of the economy have come roaring back, but the job market has been really slow to recover. In fact, we’ve lost a lot of people — something like 4% of all working moms have left the workforce — and they’re not coming back. So, while the workforce is changing, we are starting to get back to normal.
The rest of this year and into next year should continue to show above average economic growth… unless we get something that changes dramatically. But after 2023, I think that growth will begin to slow somewhat, and there’s even a chance for a recession.
Now, inflation is probably going to be an issue, as we are currently running at about a 6% inflation rate right now. And as I have been afraid of, once the inflation dragon gets out of the cage, it’s going to be very difficult to get it back under control.
The Federal Reserve has historically not done a great job of controlling inflation, and I think we’re going to see inflation stick around a lot longer than the Fed would have preferred to see.
So, what’s the best thing to buy in this type of market environment? Well, one of the best things to buy is commercial real estate companies and commercial real estate lenders.
With vaccinations and treatments for COVID, the end of the pandemic is now truly in sight, and that’s going to mean that even the weaker segments of the commercial real estate market — like hotels and offices — are going to recover.
We should see a migration back into commercial office centers, which should be great for commercial real estate companies and commercial real estate lenders.
Starwood Property Trust, Inc.
Furthermore, today’s pick also gives us a chance to invest alongside a legend in the commercial real estate business. Barry Sternlicht started Starwood Property Trust, Inc. (STWD) back in 1991 with plans to invest in real estate, oil and gas, energy infrastructure and other things.
Since that time, he has invested over $135 billion in various real estate projects. He built Starwood Hotels up to 895 properties in 100 countries around the world before he sold that to Marriott for over $16 billion.
He turned to the single-family rental market, and he turned Starwood Waypoint into one of the largest owners of single-family rental homes in the United States, eventually merging that company with Blackstone’s Invitation Homes to become the largest owner of single-family rental homes in the US. And he remains as an adviser to that company.
He’s been a wildly successful real estate investor for his entire career, and he’s turned himself into a billionaire and made hundreds of millions of dollars for his investors. So, again, we’re going to invest in one of his projects called Starwood Property Trust, Inc.
The company has been around a long time, and it makes commercial real estate loans mostly in short-term loans. And he builds a margin of safety into the lending practices, because he’ll only lend up to about 75% of the appraised value of the building, so the building has to take a pretty large drop in value before there’s any threat of them actually losing capital on the loan.
Now, they also have a great business doing workouts of distressed commercial real estate loans, where they help to service the loan, help get the property sold and the proceeds paid out to the lenders, and this is often done for far less than what the building might have appraised for. Any time the property markets are weak, this turns into a great business, although it’s still a good business most of the time.
They also own a lot of real estate — about $2.5 billion worth — including medical office property buildings across the US, and they’ll continue to do well because we have an aging population. We’re not getting any younger, and the older we get, the more doctor visits and treatments you need to have done. So, they’re extremely profitable, occupancy rates tend to be very high and it’s a wonderful segment of the commercial real estate market.
Starwood is also one of the top 10 owners of affordable housing, as they own a bunch of apartments and condos across the US. So, this is a very nice collection of commercial real estate assets, and it’s current paying a dividend of about 7.4%.
When you add that to the appreciation potential from the multi-family homes, medical office buildings and the distressed loan workout servicing division, there’s an incredible amount of upside while collecting really nice cashflows and waiting for more great things from the company. STWD is one of the best commercial real estate investments that you can make to protect your portfolio against inflation and make a whole bunch of cash along the way.
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