“I’m still bullish on commercial real estate,” said economist Mark Dotzour, Ph.D., during his keynote address at I.CON ’16: Impact Projects. As someone who stated that he loves spreadsheets and fine print, he crunched the numbers on why CRE remains a good bet.
“People are still going to want to buy real estate in 2016,” Dotzour said. He noted that real estate has an inherent advantage in being tangible and easy for investors to understand. Also: “There is nowhere else to go with their money.” Returns on alternative options aren’t looking promising:
- Hedge funds lost more than 3 percent on average in 2015.
- The S&P 500 returned 1.4 percent including dividends last year.
- The Dow was down 2.2 percent in 2015.
For a historical perspective, Dotzour said there have been 11 U.S. economic cycles since 1945, with the average recession lasting slightly more than 11 months and the average expansion reaching just over 58 months. However, as of April, the current expansion is 82 months and counting; expansions don’t quit just because they hit a time limit, he said.
“Don’t underestimate how strong our country is compared to everywhere else on the planet,” Dotzour said. People want to invest in the U.S., he said, and that will continue to be the case until Japan, Russia and China rebound. “Europe, Japan and China are barely hanging on, even with massive printing of money.”
“A substantial amount of capital continues to flow from Asia, specifically China, Singapore and Korea, into the U.S., and these flows are not expected to decline. Asian investors believe the U.S. market is fairly priced,” said Phil Marra, National Real Estate Funds Leader, KPMG LLP, in a 2016 real estate outlook report.
As one example, China – second only to Canada in foreign real estate investments – invests heavily in the U.S. with total investments reaching $8.6 billion in 2015, according to Spencer Levy, Head of Research for Americas with CBRE. “The current volatility in China has underscored for Chinese investors the importance of diversifying their investments into the U.S. and elsewhere,” said Sam Chandan, a professor at the Wharton School of the University of Pennsylvania, in a recent CNBC article.
Besides the U.S., the United Kingdom is considered another attractive investment for foreign investors, according to Dotzour. However, Bloomberg reports uncertainly hovering over a June 23 referendum on a potential “Brexit” – or exit of Britain from the European Union – with concerns about a potentially damaging ripple effect on economies across the globe.
When it comes to investments, U.S. commercial real estate continues to be an appealing choice. “Stick with what you know,” Dotzour said is his standard investment advice. “If you don’t understand an investment, don’t buy it.” People prefer real estate over other options like gold by a long shot, he said, unless they don’t understand it or have watched too many TV ads. His bottom line: “Buy real estate.”
Marie Ruff is Communications Senior Manager at NAIOP.