Is an Overheated Stock Market Driving Investors to Real Estate?
Aug 7, 2017

National Real Estate Investor published an article by ArborCrowd Co-founder Adam Kaufman on how an overheated stock market may be the reason investors are looking to commercial real estate. Read the full article below.

Pundits, analysts and everyday investors cite concerns over a potentially overheated stock, driving a demand for choosing other investment vehicles-such as real estate.

The confluence of two key factors made this possible. First, legislation in 2012 (aka the JOBS Act or Crowdfund Act) gave people newfound access to a traditionally exclu­sive investment opportunity-commercial real estate, entirely online. Second, tension, fear and uncertainty of the next stock market bubble burst.

But is the stock market indeed overheated? There is money to be made in stocks. Over the long tern1-decades in cases-investors who focus on a single industry or mar­ket sector tend to do well. But in the shorter run, investors are often buffeted by sudden movements in the market, sometimes losing a lot of value in a short time.

Investors looking for predictability don’t usually find it in the equities markets. Equities markets are prone to bubbles. The difficulty is predicting when that might hap­pen. Often to a single stock, or a group of stocks within an industry forn1 bubbles, but sometimes an entire trading market is subject to bubble-like behavior.

With any type of bubble, the cycle tends to follow a pat­tern. Bubbles expand, then they pop. Investors lose faith in the stock or the market, and prices recede quickly.

The question now: are we in a stock bubble? It’s distinctly possible. Since the end of the recession in 2008, stock prices have been rising to historic highs. The Dow Jones Industrial Average was less than 8,000 in early 2009. By early 2017, the index was above 20,000, with an extra upward bump with the election of Donald Trump as president.

Likewise, the broader S&P 500 index has risen from less than 800 in early 2009 to around 2,400 during early 2017. The tech-oriented Nasdaq index came in at less than 2,000 during the recession; now it tops 6,000. That kind of growth across a decade should be a warn­ing to be cautious in the equities markets.

A Move to Real Estate

As the volatility of the stock market is pushing investors in other directions-access to commercial real estate has become a game changer.

The wider economy and even black swan events can certainly affect the value of CRE, but those bubbles aren’t as common, at least not the dramatic kind seen in stock markets. Arguably, commercial property values were too high before 2008, and they did sink after that. But they also bounced back more quickly, and values have been rising more modestly in most markets.

Stabilized and increasingly optimistic investor senti­ment is expected to sustain current CRE investment sale levels in 2017, according to JLL. Demographically and eco­nomically strong markets with rising mid-tern1 outlooks are expected to perform strongly. That will include leading secondary markets, which are experiencing record levels of investment. One reason is probably the relative stability of real estate compared with the stock market.

In particular, multifamily has provided better returns to investors since the beginning of the 21st century than a diversified stock portfolio. U.S. multifamily investment sales set a new record in 2016 with a $150.3 billion trans­action volume.

The success of multifamily real estate helps make it perhaps the most accessible investment class for individual investors-especially those using a crowdfunding platform to invest.

Adam Kaufman is co-founder and managing director of ArborCrowd, an online commercial real estate company.