Two Areas of Interest for Investors: Utilities and Real Estate

Jeffrey Roach:

Hi, I am Jeffrey Roach, chief economist for LPL Financial. And in this latest edition to the Street View podcast, I'll give you some areas of interest in this current macro landscape.

Jeffrey Roach:

First, let's look at the opportunities within the utility space. In our recent investment committee meetings, we've been highlighting the growing demand for electricity from the exponential growth in artificial intelligence applications, data centers, which it's the brain behind all the data processing and storage. Well, they require massive amounts of energy. Our technical strategist, Adam Turnquist, put this chart together to make the point that companies are frantically preparing for the changing landscape from AI. The chart highlights how many times the phrase "data center" was mentioned during quarterly earnings calls among companies within the S&P 500 utility sector. In order for us to use generative AI, when we go through the internet, search engines have to use a lot more electricity. In fact, this improvement in search functionality amounts to roughly a tenfold increase in electricity consumption. So new power infrastructure is expensive and takes some time to bring online. Total capex, among domestic utilities companies are forecasted to increase 30% in the next few years. Well, the second item I want to highlight for this episode is the heterogeneity of the commercial real estate market. I often hear folks ask me about commercial real estate, but I know by their question they really are honing in on office space, but the commercial space is really quite diverse. Here's a chart that illustrates the varied experience within the space. Many of the sub-sectors like data centers, multi-family, residential, and healthcare, are very different than office space. So it's really important to realize the same headwinds that office and some retail real estate have faced from a shift to remote work and digital shopping have actually turned out to be tailwinds for industrial and data center real estate sectors. Well, the key takeaway here is during this unique period in the macro landscape, it behooves investors to look past the headlines and make sure to understand the divergence among subgroups. Well, that's all for now, but please continue to follow us on social media for up-to-date analysis on the investment landscape. Take care.