From a small northwestern observatory…

I’ve been asked several times in the past few days to comment on the economy, the market, and particularly real estate during this current crisis.  By the way, as a general rule, real estate is a safe harbor during times of crisis, but that doesn’t give a very good answer to an immediate question.  Let’s look at it another way.

First, it appears that the stock market really started realizing that this was a problem in late February.  Indeed, the S&P 500 hit a peak of 3,386 on February 19.  That was an increase of almost 4% in less than two months.  Then the reality hit that this thing could have very real impacts on supply chains, spending and consumption behavior, corporate profits, and thus the economy as a whole.  As of the close yesterday, the S&P was down an astonishing 12.2% in only 12 trading days.

That’s a fairly short timeframe in which to measure real estate returns.  However, I have a couple of good proxies for that.  As you know, I manage a small, private REIT hedge fund called ACCRE.  This is a carefully curated fund, and has out-performed the S&P by about 2.5X since I started it in 2017.  (For more about ACCRE, please visit the web site, www.accre.com.)  I also track the S&P Global Property Index, which is a daily traded index of securitized real estate.  While neither of these is a perfect measure of how all real estate is doing in this crisis, these do give some measures of how well real estate can attenuate the volatility in a portfolio, and whether or not well-chosen real estate investments can really be safe harbors.

To make a comparison, I “normalized” all three indices to = 100 on January 2, 2020.  That way, all three indices will fit on the same graph:

The Global Property Index, unfortunately, tracks the S&P 500 fairly well, although with a bit less volatility.  It is a weighted index, but not a managed one.  Hence, a broad random investment in real estate may have performed better the past few weeks, but not by much.  ACCRE, on the other hand, is a carefully managed portfolio, and has actually performed quite well this year.

Volatility is simply the standard deviation of the indices since January 2.  As you can see, the S&P has not faired well, but the Global Property Index has done a bit better, albeit with much lower volatility.  The managed (I would use the word “curated”) real estate portfolio is actually still up on the year, and with the lowest volatility of the three.

I’m asked almost every day, “when is it a good time to buy real estate?”  A surprising number of investors expect a recession, and want to wait until the depths of the recession to move money from stocks in to real estate.  Clearly that’s counter productive.  The time to buy carefully selected real estate was three weeks ago.  However, it may not be too late.