Volatility is something investors will face, but real estate investments can mitigate the effects of volatility on your overall portfolio.1
In the early days of the pandemic, the Dow Jones Industrial Average lost 37% of its value in a little over a month. But in subsequent months, the stock market rebounded almost as quickly as it fell. This is volatility at its best, or worst, depending on your portfolio.
In contrast with the stock market, real estate has historically been less volatile. This may be related to these reasons:
Longer-Term Holds
We all know the adage “buy low, sell high.” But when there’s an economic downturn, nervous investors might choose to sell on the downswing in an attempt to protect a greater portion of their potential earnings. After all, it’s better to lose $1.00 a share than $10.00, right? But this rush to sell, which is usually easy thanks to e-trading platforms, can cause an even more significant price drop, which in turn can lead to more panic selling.
Real estate investments, on the other hand, typically work in years, not days or weeks (or even quarters). Generally, real estate projects target a hold period of at least two years, some target as many as ten. This means your real estate investment may be held through several market cycles. And since your investment in private equity real estate is illiquid, meaning you can’t sell whenever you want, it can help ensure you don’t fall victim to the panic-selling mentality.2
While there are always exceptions to the rule, when the public markets are volatile companies can take a hit. Real estate values, on the other hand, may often be more impacted by local market drivers. For example, apartment rents rise in metros that people are moving to. Ski resort reservations explode in the winter but often vanish in the summer. Industrial properties in port cities are bustling around-the-clock. It’s not to say that what’s happening on the national level won’t impact real estate values, but the local situation can often be relevant.
Real Assets, Real Values
Real estate investors can potentially earn income in two forms: ongoing cash flow generated by income, or from a share of the property’s final sale price. Property values rise and fall during market cycles, but they tend to appreciate over time. More conservative business plans might assume less appreciation in the end, but anticipate more steady cash flow, while more opportunistic projects are hoping for significant appreciation over the hold period. For instance, an apartment building that is worth $28 million in year one might sell for $45 million in year six thanks to significant property improvements that ultimately increased the value of the building. Overall, commercial real estate prices increased by 24% in 2021 with significant price appreciation in most asset classes.
Volatility is something investors will face, but real estate investments can be a valuable addition to your investment strategy and may help mitigate the effects of volatility on your overall portfolio.
[1] Private real estate is, by nature, generally less volatile than the stock market. This lack of volatility does not necessarily translate to private real estate not fluctuating in or losing value. Further, the value of private real estate investments will fluctuate, and the value of real estate often lags behind general market conditions.
[2] An investment in a private placement is highly speculative and involves a high degree of risk, including the risk of loss of the entire investment. Private placements are illiquid investments and are intended for investors who do not need a liquid investment.
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Investing in commercial real estate entails substantive risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. An investment in a private placement is highly speculative and involves a high degree of risk, including the risk of loss of the entire investment. Private placements are illiquid investments and are intended for investors who do not need a liquid investment.
All information provided in this article has been prepared solely for informational purposes and does not constitute investment, legal, or tax advice, or an offer to buy or sell any security or investment product. The information contained herein has been obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness.
