By Jennifer Perkins, Portfolio Manager, Principal Real Estate Investors
Much hasnt changed since the start of the year! Financial markets have recovered somewhat, but are still volatile due to geopolitical concerns, and declining oil and commodity prices have also impacted stock prices and economic growth. Meanwhile, the chase for yield in a low interest environment still continues in fixed-income markets. With an eye on the road ahead, investors are hoping for a smoother and less stressful ride to meet their investment goals. The vehicle that could get them there is commercial real estate!
This is the second in a series of four blog posts highlighting some compelling reasons why we believe many investors should include private - also referred to as direct-owned - commercial real estate in their investment portfolios. While these reasons are not new, market volatility, changing market dynamics, and the potential of lower long-term return expectations raise an opportunity to reiterate the case for considering the asset class for inclusion into your portfolio.
Compelling reasons to include private commercial real estate:
- Adds portfolio diversification.
- May aid in dampening volatility, potentially increasing portfolio total risk-adjusted return.
- A source of potential income.
- A possible defense against unexpected inflation.
Just to recap, my last blog post discussed why private commercial real estate hasnt historically conformed to similar whipsaw behavior the equity market was experiencing at the start of 2016, potentially allowing for private commercial real estate to add true diversification to an investment portfolio. This blog post expands upon Reason 2: Private commercial real estate may aid in dampening volatility and increases the potential for improving total portfolio returns adjusted for risk.
As an investor in private commercial real estate, you are buying units of ownership of office buildings, industrial buildings, apartment buildings, retail centers, and even hotels. The buildings comprising a larger portfolio are acquired through private transactions between a willing buyer and seller, specific to individual properties. Investing in tangible properties influenced by space market fundamentals (meaning tenant demand and available supply) versus investor sentiment likely helps to dampen volatility. Unlike Real Estate Investment Trusts (REITs), private commercial real estate is not influenced by fractional ownership trading, which occurs in public markets on a public exchange.