In the Next Downturn, Public Markets Will Be CRE Investors’ Best Bet
April 24, 2019 | Peter Linneman | Commercial Property Executive
We are frequently asked where the real estate investment opportunities will be during the next down cycle. Our advice is to watch for opportunities in public markets, rather than in the private markets, which defined the down cycles in the early 1990s and 2000s. A prevalence of public-market opportunities characterized the 2008-2010 downturn, and we believe this will again be the case.
Our reasoning is that greed swings more rapidly to fear (and back again) in the public markets. In addition, private-equity dry powder—totaling more than $325 billion, as Prequin reported in February 2019—will create fairly competitive bidding for private assets, even in the face of fear. So we suggest that those hoping to prosper from deeply discounted pricing during the next down cycle should start educating themselves on REITs today so they are ready to jump in when the time is right.
We expect commercial real estate to perform well in 2019-2020 even as interest rates increase, due to continued capital flows and solid NOI growth. Contrary to mythology, real estate equity returns have historically been better during periods of rising interest rates, partly because owners had locked in low long-term fixed-rate debt, while enjoying increased incomes from improved occupancy and higher rents.
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