Market Volatility of Rockford Commercial Real Estate
At a time when many investors and investment professionals struggle to find attractive returns in a world of tissue-thin and even negative interest rates — and while wondering about the continuation of the record-long bull market in equities — an asset class long-favored by institutional investors stands out: Rockford commercial real estate. Typically underrepresented in portfolios of individual investors, commercial real estate can offer a mix of stability, income, and capital appreciation that many investors and their advisors are seeking.
Composition of Capital Markets
At present, there is approximately $43 trillion in the bond market, $26 trillion invested in publicly traded equities and $17 trillion in U.S. commercial real estate (Source: World Bank, SIFMA, NAREIT, December 31, 2018). Leaving aside cash, commercial real estate accounts for almost 20% of total market assets. Most individual investors are woefully under-allocated in this asset class and represent only a fraction of the reported market capitalization (home values shouldn’t be considered Rockford commercial real estate investment). From the point of view of client portfolio construction, you should consider an allocation to commercial real estate as you would any other major asset class.
Investing in Rockford Commercial Real Estate
It has lowered volatility in client portfolios. For example, the NAREIT All Equity Index Series, which tracks public real estate investment trust (REIT) shares, had a 0.68 correlation to the S&P (September 1, 2013 – August 31, 2016). In August 2016, the S&P, Dow Jones Indices and MSCI moved listed equity REITs and other listed real estate companies from the Financials Sector of their Global Industry Classification Standard (GICS®) to into its own sector. This recategorization acknowledged that traded REITs represent a distinct asset class growing in popularity and worthy of isolating its performance metrics. Not surprisingly to industry professionals, the correlation of traded REITs to the S&P has since dropped to 0.50 (September 1, 2016 to August 31, 2019). This alone provides a compelling rationale to allocate commercial real estate when building a better client portfolio.
All asset classes go through cycles, but historically commercial real estate has proven to be much less volatile than equities. From January 1,1999 to December 31, 2018, privately held commercial real estate (as reported by NCREIF Property Index) has declined in value on a calendar year basis only twice. Listed REITs (as measured by NAREIT All Equity REIT Index) for the same period declined only four times. The perception of real estate boom and bust cycles may have more to do with investors confusing the fundamentals of homeownership with Rockford commercial real estate investment. These are very different. The performance of the commercial asset class over a long period of measurement speaks for itself. Indeed, as investment managers, we concern ourselves with periods of drawdown and the impact on investment outcomes. Minimizing the occurrences of drawdowns is imperative when constructing healthy investment portfolios. Diversified ownership of core commercial real estate is a great way to accomplish this goal.