Investing in Commercial Real Estate

One of the best questions we receive from prospective investors is "why should I invest in Real Estate, when the S&P outperforms..." Our investors are generally family offices who have successful businesses and work with the "best" (if you've read "The Intelligent Investor" you understand why I used quotes...) investment advisors in the country. What happens is many are blessed with short-term memory and often forget the importance of diversifying a portfolio.

While it is true that the S&P index will outperform specific investments, it's also true that investors all too often do not benefit from the outperformance. how so? Well, let's take a look at the markets as I write this blog.

Since April 1st, the markets have been taking a beating. To date, the S&P is down about 9% and many fear there is more to come. While the markets tank, fear sets in, and individual investors often panic and sell only to realize the terrible mistake they made. So they proceed to buy back their positions, at a higher price, and then when the next panic approaches, they follow the same actions. This "buy-high and sell-low" strategy isn't unique to any one investor - so don't beat yourself up if you're guilty of this. I'll paraphrase Warren Buffet for a moment to give color on why this happens. The stock market is like a crazy salesperson who is constantly knocking on your door, yelling at you to sell your home at a price they themselves decide on. They keep knocking and knocking and knocking....

So back to the question - why invest in real estate instead of the S&P? Well, the answer is you shouldn't! In fact, you should invest in both the S&P and real estate. Diversification works. While the S&P has been taking a beating the past few days, guess what is working? Yes, real estate! As the markets have gone down, there's been an overall flight to safety which is treasuries. The yields on treasuries have gone lower making it cheaper to borrow money for real estate.

But - here's the bottom line. EVERY investment and asset class has its own set of economic cycles. There are ups and and there are downs. The difference with real estate however is, you do not have a crazy person yelling at you to tell you your investment is worth 50% less! There are no daily updates on the fluctuation of a real estate investments and therefore there is no fear-factor causing a massive sell-off. Think about it - as long as the asset is not over leveraged and the manager is focused, who cares what the value is mid-investment? Stay the course and the targeted value will be achieved when markets come back.

In short, investing in real estate is a diversification from the S&P, not a replacement. While the S&P has pricing updates every second, real estate does not. In both cases, if you believe in an investment when you first invested, don't let the fear in a downturn change your belief. The big benefit with real estate with this challenge is it is much harder to sell when compared to the S&P, and therefore, you will more often than not, ride the wave of the cycles.