CRE Tops Alternative Investments

Commercial real estate remains more appealing than many alternative investments including stocks, bonds and cash–largely due to CRE’s relatively stable income component–reported Situs RERC, Houston.

“Amid the ongoing U.S. political drama that is expected to continue in 2018, the stable income component with modest appreciation from commercial real estate provides an attractive choice in the uncertain future of alternative investments such as stocks and bonds,” said Situs RERC President Ken Riggs.

Riggs said risk-adjusted returns for commercial real estate are favorable to other asset classes over the long term and also provide investment diversification.

The Expectations & Market Realities in Real Estate 2018–Stability in a Risk Environment report noted CRE returns have held up against stocks over the long term with less volatility than the stock market. The 15-year annual return on the Dow Jones Industrial Average and S&P 500 equaled 10.23 percent and 10.04 percent, respectively, while the National Council of Real Estate Investment Fiduciaries’ CRE Property Index had a 15-year annual return of 9.09 percent and the 15-year annual return on the 10-year Treasury was just 3.21 percent.

“The significantly greater long-term returns over the 10-year Treasury make investment in commercial real estate as opposed to bonds worth the risk premium,” the report said. “While investing in one or another asset class is never a binary decision, commercial real estate tends to be more favorable than other investment alternatives because of the relative stability of the income component of returns.”

In addition, investors can reap tax benefits from commercial real estate investments while hedging against inflation, the report noted.

Commercial real estate fundamentals expected stability further supports the stability of this asset class, the report said. When Situs RERC surveyed top CRE valuation experts in third-quarter 2017, 80 percent predicted CRE values would remain the same and 20 percent predicted they will increase slightly. “Over the course of 2017, significantly more respondents came to believe that the tremendous CRE price growth witnessed over the past recovery cycle would continue in 2018 and that the eventual correction in values will be minimal,” the report said.

“In 2018, expect generally stable performance and values across most U.S. markets and major commercial real estate asset types, as we move further into a mature market cycle,” Deloitte Transactions and Business Analytics Principal Matt Kimmel said.

Despite continued confidence among real estate investors, the CRE market may be beginning to slow from its peak, the report noted. “Market participants should look to take advantage of high prices and strategically shift their portfolio allocations to better capture market potential,” it said.