Situs RERC: Investors Still Favor Real Estate, But Cash’s Rating Grows

Although institutional investors continue to rate commercial real estate higher than alternative investments such as stocks, bonds and cash, CRE ratings declined in the first quarter while cash improved, reported Situs RERC, Houston.

Investors gave CRE a 5.8 rating on a 10-point scale with 10 being excellent, the company’s Real Estate Report said. The ratings for stocks and bonds declined to 4.5 and 3.4 respectively while cash’s rating increased to 4.3.

“Commercial real estate has been preferred over the alternatives for the past five years,” said Situs RERC President Ken Riggs. “However, the decline in the commercial real estate rating in first quarter 2016 was quite significant, making this the lowest rating this asset class received since 2010.”

For individual property types, Situs RERC’s investment conditions ratings varied. With a 6.4 investment conditions rating, the highest-rated property types were the industrial warehouse sector–which earned the top investment conditions ratings for the past three years–and the neighborhood/community retail sector. The suburban office and regional retail mall sectors had the lowest investment conditions score with 4.9 ratings.

Situs RERC also measures the long-standing relationship among these investment alternatives using a CRE vs. Alternatives Preference Index, which demonstrates institutional commercial real estate investors’ changing preferences for CRE over traditional asset classes such as stocks, bonds and cash. A 100 index score indicates that investors feel that traditional assets and cash are equally attractive as commercial real estate. A score over 100 indicates investors’ preference for commercial real estate and a score below 100 indicates a preference toward non-CRE investments.

The CRE vs. Alternatives index has trended down over the past few quarters, Situs RERC reported. In the first quarter, the index equaled 117, down from 123 in fourth quarter 2015.

Riggs called it interesting to note that the high reading of 128 occurred in first quarter 2014 and the low reading of 89 occurred during the credit crisis in first quarter 2009. “As commercial real estate continues to mature, investment return is increasingly available only through rental income and it appears that the investment appeal of commercial real estate may be declining somewhat,” he said.