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.
Inflation hedging is still a priority in portfolios
After a dramatic surge, inflation has made substantial progress toward the Fed’s 2% goal. However, some investors still worry aspects of inflation could be sticky, and in the long run, inflation is likely to settle slightly above the Fed’s 2% target. Real estate returns tend to be higher during above-average inflationary environments because higher costs can be passed on via higher rents, so long as economic growth is also solid. Residential and commercial property prices also often rise with inflation as well.
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.