Use three Guide to Alternatives slides to support client conversations on the opportunities in direct real estate.
Diversification is crucial in periods of stress
Investors require adequate diversification to protect portfolios from volatility. Over time, direct real estate has exhibited low or negative correlation to the S&P 500. This diversification may be more valuable than ever as episodes of higher stock/bond correlations have increased. Although real estate/equity correlations have spiked during prior recessions, they tend to then reverse quickly and sharply to restore diversification properties. Real estate also tends to have low volatility and produces stable cash flows.
Real estate offers durable income streams
An important component of investing in real estate is the consistent income streams that these properties can provide across all market cycles. This income is derived from rents charged to tenants as well as active property management. Not only can this provide a hedge against inflation, but it also makes real estate an effective complement to traditional fixed income portfolios. Real estate also has the potential for capital appreciation, acting as a diversified return enhancer within portfolios.
Prices are resetting, but property sector selection is important
Prices are resetting across real estate, which can present an opportunity for investors to find quality properties at a reasonable price, if those property sectors are well-supported structurally. Demand for different sectors within real estate, represented by vacancy rates, illustrates that areas like industrial (data centers, warehouses, logistics) and apartments still face strong demand, but areas like office still face challenges given hybrid work arrangements and excess supply.