October has been a chaotic month for the financial markets. On four of the first 10 trading days of the month, both the Dow and the S&P 500 either rose or fell more than 1%.
RERC, a SitusAMC company, finds that the current investment environment has become not just uncertain or unpredictable, but almost random. This environment underscores the need to sift through the chaos to recognize where opportunities exist.
The news constantly bombards us with dire warnings: a steepening yield curve inversion, slowing global manufacturing, unsustainable public debt, negative interest rates, trade wars and ongoing geopolitical issues such as Brexit and the Hong Kong protests. The Trump administration, now under siege by an impeachment inquiry, seems to change its stance on U.S.-China trade policy every day.
Commercial Real Estate (CRE) can provide better opportunities for investors during an economic downturn than stocks and bonds. Historically, CRE has also been more resistant to external shocks and less volatile than other investment alternatives. As a physical asset, CRE provides relatively stable, predictable and recurring income as rents are contracted under lease terms. This — coupled with increasing, albeit measured, growth in CRE fundamentals over the next year — continues to make CRE the best positioned investment alternative as we head into the next recession.
Not all property types are created equal, though. The industrial market continues to shine with double-digit annual NCREIF Property Index (NPI) returns and buyers paying high premiums. The sector’s fundamentals remain best among property types due to limited supply and exceptional demand caused by the continued growth in e-commerce. The apartment sector is the second-hottest property type because low unemployment, modest wage growth and barriers to homeownership support demand and further rent growth.
Low unemployment is also supporting fundamentals in the office sector, but structural changes including demographic and technology trends are likely to reduce office demand in the future. The hits keep coming in the retail sector. With net operating income (NOI) coming under stress, identifying poor or risky tenants from good tenants has become even more critical.
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