It’s not news that the current economic and financial situation might be considered volatile, with the stock market posting up-and-down activities and the bond markets behaving abnormally. In this type of climate, who ends up being the most active real estate investor?
In a recent video, Marcus & Millichap Senior Vice President John Chang pointed out that commercial real estate tends to be viewed as a viable investment option during times of uncertainty. However, “each type of investor will likely behave differently,” he said, then proceeded to outline which might step up during this period.
Foreign Investors
Chang explained that during the cycle over the past 15 years, direct foreign investment made up about 11% of the total CRE buyer activity, on average. However, foreign investors aren’t quite sold on U.S. assets these days for various reasons. “Assuming the experts are correct and international investment in the U.S. is tapering, fewer foreign investors may be at the table of U.S. commercial real estate,” Chang said.
REITs
Chang indicated that real estate investment trusts—REITs—have made up about 13% of the buyer pool. However, REIT activity aligns with their stock valuations. Said Chang: “REIT prices have been impacted by the recent stock market volatility.”
Institutional Investors
While institutional investors made up about a quarter of the CRE buyer pool, Chang indicated two things that could likely hold them back:
- They tend to be cautious during volatile times
- They have specific portfolio allocations to various assets; when portions of the portfolio gain or lose value, they rebalance their allocations.
Change explained that if stocks and bonds lose value, institutional investors could sell commercial real estate to “rebalance the composition of their assets.” While this isn’t currently happening, Chang suggested that continued weakening in the stock and bond markets could encourage institutions to rebalance their portfolios.
Private Investors
Change noted that private investors historically made up about 46% of the real estate buyer pool; they also tend to behave differently from institutional investors during uncertain times.
During and in the aftermath of the pandemic, private investors:
- Made up 52% of the buyer pool in 2020 and 2021
- Made up 59% of the pool in 2022
- Made up 61% of the pool in 2023, as interest rates increased
“In a climate of uncertainty and financial market volatility like we currently face, I suspect private investors will be the most active buyers in the market,” Chang pointed out. And while real estate will face its challenges, “real estate prices have recalibrated since 2022,” Chang said. “The combination of positive demographics and falling construction levels position this sector to strengthen over the long term.”
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