By Bob Champion, CEO, Champion Real Estate Company
But investors continue to sit on the sidelines, still spooked by the tumble in real estate values during the financial crisis and failing to realize that prices have not only fully recovered.
As an investment, the case for real estate remains iron clad. Not only has the sector outperformed the S&P 500 over the past 40 years (an average annual return of 9.3% for the NCREIF Property Index versus an 8.7% return for the S&P 500), it’s done so with dramatically less volatility (7.8% compared to 16.4%).
Yet many investors continue to sit on the sidelines, still spooked by the tumble in real estate values that accompanied the financial crisis and failing to realize that prices have not only fully recovered, but as of the end of 2015 real estate produced a 53% total return (including both asset value increases plus investment yield) since the NCREIF Index peak of 2008.
After a prolonged run-up, it’s only natural to question whether we’ve reached the peak of this current business cycle. But even if that is the case, it by no means necessarily translates into turbulent waters for real estate. Historically, real estate cycles and business cycles rarely coincide. In fact, as the chart below depicts, there’s an extraordinarily low correlation between the two. Since 1981, there have been a total of six years in which the S&P 500 posted negative returns. In all but one of those years, commercial real estate provided positive returns. The S&P delivered an average 14.6% loss during those years while commercial real estate delivered an average 6.4% gain.
Where are we in this real estate cycle?
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