Why Real Estate will continue to be the Safest Investment


It’s been one of the most volatile years on record. In the first few weeks of 2016, the major indices saw trillions of dollars wiped out shortly after the Federal Reserve raised rates, and on fears of a China slowdown.

Then, for a brief time we rallied to new highs, which would give way to a substantial global market decline on fears of the UK vote to exit the European Union.

Markets would again rally shortly after, which again gave way to fears of a September 2016 interest rate hike, concerns of another failed OPEC meeting, and, of course, one of the most fiercely debated presidential elections.

While global indices and stocks have been excessively volatile in recent months, one of the safest investments for long-term investors has been real estate.

Others may note the real estate bull may soon pop, but we see no signs in a low-interest rate, high-yielding environment.

The Federal Reserve warned that commercial real estate prices may have “run up too far too fast,” reports Bloomberg. Valuations in commercial real estate, “appear increasingly vulnerable to negative shocks,” Bloomberg went on to say.

However, this isn’t the first time the Fed has warned about this. In July 2015, the central bank noted in The Wall Street Journal, “Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly.”

Given that a great deal of capital inflow from domestic and foreign investors seeking high-yielding opportunities in a low interest rate environment is taking place, I never believed the Fed was correct in its assessment.

Morgan Stanley has said U.S. commercial real estate prices would be flat in 2016, as compared to previous forecasts for 5 percent growth. Bloomberg reports that analysts are also concerned that income generated from such properties won’t be enough moving forward to keep investors happy and help maintain returns in an uncertain environment of slowing earnings, and potential recession.

The Urban Land Institute recently reported nationwide commercial real estate activity is expected to fall over the next three years with prices likely to increase at a slower rate. The group expects for volume to decline over the next three years to $475 billion in 2018.That’s down from $525 billion in 2016.

PIMCO, an influential investment management group, is also warning that capital inflows are beginning to decrease. As a result, according to Bloomberg, “U.S. commercial real estate prices may fall as much as 5 percent in the next 12 months amid tightened regulations, a wall of debt maturities and property sales by publicly traded landlords.”

However, as just reported by National Real Estate Investor (NREI), “The U.S. property market landscape in 2017 will be characterized by continued strong fundamentals, increased investor flows and high transaction volume.”

Global economic and political uncertainties will play a big role for commercial real estate, as well, as noted by NREI.

We’re also likely to see a low-interest and cap rate environment for quite some time, an increase in foreign investment in the U.S. as economic and political uncertainty increase, and slowing new supply to market. Can some one please show me where there’s weakness? I don’t see it.