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Why CRE Is Proving More Stable Than Stocks, According To One Expert

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The stock market has been on a tumultuous ride as of late, making commercial real estate even more attractive to investors looking for stability amid the chaos.

ā€œI think it gives everyone a little heartburn to see the S&P 500 fall by more than 6% in a little over a week,ā€ says Marcus & Millichapā€™s John Chang. ā€œBut the stock market has been on this trend for awhile.ā€

Specifically, the stock market is down by 10% over the last month and by 24% from the peak at the beginning of this year. And while it gained 27% in 2021, the losses this year have basically wiped out last yearā€™s gains. The CRE market also had big pricing gains last year, according to Marcus & Millichap data, led by industrial at 17.9%, self-storage at 13.6% and apartment at 8.1% The difference?

ā€œWhile the stock market peaked at the end of 2021, ā€œcommercial real estate kept going,ā€ Chang says.

In the first half of 2022, the average industrial prices went up by 13%, self-storage went up by 10.5%, and hotels increased by 13.7%. Meanwhile, in the first half of 2022 the stock market fell by 20%. Ā The caveat, however, is that pricing is typically locked in 90 days before a deal closes, meaning second quarter pricing numbers were probably locked in before the Fed began aggressively raising rates.

Chang says the Fedā€™s press conference after its latest hike on September 21 ā€œwill probably impactā€ CRE pricing, ā€œbut the impact will be far less severe than what weā€™re seeing on Wall Street.ā€

ā€œIn general, CRE values tend to move more slowly than the stock market. They also tend to be less dramatic,ā€ Chang says, adding that quarter-over-quarter pricing swings over the last 20 years have been ā€œenormousā€ while commercial real estate pricing has largely remained steady.

Total annual returns also drive this point home, with CRE delivering a compound annual growth rate of 7.8% since 2000, beating the S&P at 5.3%.

ā€œIt still has its ups and downs, but its amplitude tends to be very modest compared to the stock market,ā€ Chang says.

 

Source: GlobeSt.