After a period of pandemic-fueled heightened investment activity, 2022 saw a slowdown in commercial real estate investing, with transaction volume down over 20% in the third quarter relative to a year earlier. While some sectors remained resilient, the year saw an overall 13% slump in commercial real estate prices, according to Green Street. These metrics reflect a slowdown in commercial real estate investing as a response to macroeconomic concerns, including inflation and rising interest rates.
Source: PWC - Real estate: US Deals 2023 Outlook. The above chart is for illustrative purposes only.
Frankly speaking, fear may be driving investor uncertainty and leading to stagnant capital left sitting on the sidelines. In these times, however, some may be reminded of Warren Buffet’s investing mantra: “Be fearful when others are greedy, and greedy when others are fearful.”
The great paradox of investing is that oftentimes favorable long-term opportunities emerge when the market is least apt to seize them. For commercial real estate markets, this is historically the case with strong, relatively consistent price appreciation in the five-year period following the 2001 and 2008 recessions. For those investors who subscribe to Buffett’s thinking, it may be a different fear that’s top of mind:
Is now the wrong time to be opting out?
Despite investor uncertainty, commercial real estate has demonstrated relative resilience as capital has become more scarce and debt an increasingly expensive source of capital. For those vehicles that are positioned to take advantage of growth-oriented opportunistic investments, now could be a compelling time to tactically invest. As rising rates and uncertainty trigger capital constraints and repricing begins to create the favorable entry terms being seen today, new opportunities emerge.
In addition to the potential for an opportunistic investing environment, private real estate has historically offered potential benefits to investors in times of high volatility due to its generally lower level of volatility relative to the equity markets and its historical ability to help mitigate the effects of inflation.*
Instead of opting out altogether, investors looking to navigate the current volatility while still capitalizing on the potential for long-term growth offered during this investing cycle could benefit from reviewing their allocations to private real estate.
*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.
A private real estate portfolio for today’s market
Growth-oriented private real estate investments such as CrowdStreet Advisors’ managed offering, the CrowdStreet REIT (“C-REIT”), could offer potential benefits for investors in today’s uncertain environment. With its nimble and opportunistic investment strategy, focused on long-term growth themes, C-REIT could be well-positioned to take advantage of market dislocation as conditions present potentially favorable entry points.
The recent sell-off has created some speculation that the next couple of years could be good ones to deploy capital, especially for those vehicles focused on long-term fundamentals. The question is, will investors opt in or opt out?
1 PWC - Real estate: US Deals 2023 Outlook.
2 Green Street Commercial Property Price Index.
3 Green Street Commercial Property Price Index.
5 Green Street - Private Capital Begins Hunting for Bargains, November 29, 2022
6 CCIM Institute - Non-Traded REITs offer Stability and Portfolio Diversification
8 PWC - Real estate: US Deals 2023 Outlook
This article was written by an employee of CrowdStreet Advisors, LLC, a registered investment advisor and a subsidiary of CrowdStreet, Inc.
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