Real Estate Market is Different This Time | FTI Consulting

The Real Estate Market is Different This Time: 2016 is Not 2008

Real Estate | Valuations | Real Estate Finance Journal (Reprint)

February 16, 2017

As an investment class, real estate has and continues to compete favorably with stocks, bonds, and alternative investments and serve as a strong alternative for investors seeking to generate returns and offset risks from financial market volatility. The authors of this article discuss today’s real estate investment market and compare it to the market in 2008.

Investment grade real estate since 2009 has experienced a period of growth in sales volume and price appreciation and low capitalization rate environment which rivals that of the 2001-2007 periods. In fact, the data illustrates a pattern eerily similar to the pre-recession period, which has some real estate industry professionals and investors concerned that the market may be overheated and driven by speculation as opposed to sound market fundamentals. In addition, there are concerns that a potential increase in interest rates would negatively impact real estate values.

Investors and analysts develop and support their underwriting assumptions for real estate investment risk by analyzing historic and recent economic trends evidenced in capital market instruments as well as property fundamentals. Observed data suggests that market fundamentals are supportive of continued real estate value growth and real estate markets are not overheated and can absorb modest interest rate increases in the future.

As Federal Reserve actions have lowered economy-wide interest rates, the investment markets have gravitated to and invested greater shares of capital into commercial real estate assets. The volume of transactions and demand for real estate as an asset class is primarily due to the low returns offered by alternative investments and the favorable risk premium for real estate in prime markets (stability, appreciation, and hedge against inflation). As an investment class, real estate has and continues to compete favorably with stocks, bonds, and alternative investments and serve as a strong alternative for investors seeking to generate returns and offset risks from financial market volatility.

Posted with permission from Real Estate Finance Journal. Copyright ©2016. All rights reserved.

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