Why One Expert Says the Outlook is Brighter for CRE as Opposed to Stocks

CRE pricing “will probably be impacted” by the Fed’s most recent rate increase, but less so than what is happening on Wall Street.

Recent volatility in the stock market has made commercial real estate even more alluring to investors seeking security in the midst of the mayhem.

According to John Chang of Marcus & Millichap, “I think it gives everyone a little heartburn to watch the S&P 500 tumble by more than 6% in just over a week.” But this trend has been present in the stock market for some time.

The stock market has fallen by 10% over the past month and by 24% from its peak at the start of this year. And while it increased by 27% in 2021, the losses this year have essentially eliminated the gains from that year. According to Marcus & Millichap data, the CRE sector also had significant price increases last year, with industrial leading the way with 17.9%, self-storage coming in at 13.6%, and apartments coming in at 8.1%. Chang claims that even after the stock market reached its peak at the end of 2021, “commercial real estate kept going.”
Self-storage prices rose by 10.5%, industrial costs by 13.7%, and hotel prices by 13.7% in the first half of 2022. The stock market, meanwhile, experienced a 20% decline in the first half of 2022. The catch is that prices are normally set 90 days before a deal closes, so the pricing figures for the second quarter were likely set before the Fed started raising rates significantly.
Chang claims that the September 21 news conference following the Fed’s most recent rate hike “will undoubtedly have an impact” on CRE prices, but that this impact “will be far less severe than what we’re witnessing on Wall Street.”

CRE values typically fluctuate more slowly than stock market values. They also tend to be less spectacular, “he argues,” pointing out that commercial real estate pricing has mainly remained stable over the last 20 years, despite “enormous” quarterly price changes.

The fact that CRE has delivered a compound annual growth rate of 7.8% since 2000, outpacing the S&P at 5.3%, further emphasizes this thesis.
Although it still experiences ups and downs, Chang notes that they are often far more moderate than those seen in the stock market.

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