The broader equity markets continue to exhibit volatility and expected returns are much lower than in previous decades. Highly respected investors such as Warren Buffett have predicted that total stock market returns over the next decade will likely not average any higher than 6-8%/year - and any such returns will be accompanied by high volatility. In contrast, well purchased commercial real estate that is prudently leveraged provides an opportunity to earn higher returns at a lower risk/volatility level than investments in the stock market. In order to reduce the overall volatility of returns, many investment experts are encouraging individuals to include commercial real estate that is professionally managed, as part of a well-balanced portfolio. Real estate returns are less volatile as they are based on relatively predictable and reliable cash flow streams from tangible assets, whereas the strength of returns in the broader equity market are heavily dependent upon price appreciation/capital gains.
The attractiveness of real estate in general versus public equities and other investment alternatives such as bonds is based on facts strongly favoring real estate returns. For example, in the last 20 years, the Wilshire Real Estate Investment Trust Index beat the annual returns for the S&P 500 65% of the time. $100 invested in this REIT Index during this period would be worth $828.86 versus only $364.16 if this same amount had been invested in the S&P 500.
Based on stellar long term results, real estate has become a core asset class for institutional investors. This has added professionalism and liquidity to this large but private investment category. It has not gone unnoticed by institutional investors that the total returns of investment grade real estate, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), have been negative in only 3 of the past 27 years.
The following chart shows comparative returns for institutional grade real estate, the S&P 500 stock index and an investment grade bond index over 1-year and 10-year time horizons. Over both the short and long term, real estate returns have significantly outperformed both stocks and bonds. In fact, over a 10 year period, the S&P 500 index has been relatively flat while the Wilshire US REIT Total Market Index has returned over 9.0% annually.