Real estate returns brightest after recession clouds clear, finds study

Real estate market's current market instability likely to give way to strong vintage returns in 2023 and 2024

Real estate returns brightest after recession clouds clear, finds study

While real estate values are rapidly declining because of the economy's slowdown, rising financing costs, and growing recessionary fears, investors who maintain or increase their investments during the downturn might just benefit from it.

The most recent report from Cohen & Steers, a firm with US$88 billion in assets – including US$56 billion in real estate – shows that superior returns in real estate frequently follow recessionary periods, reported Institutional Investor.

“Listed tends to lead private real estate in both selloff and recovery during recessionary periods,” according to the report.

Read more: Is it time to catch the real estate wave?

“Differences in the real-time pricing of listed REITs and private real estate can create significant short-term dislocations. By understanding the leading and lagging behaviors of private and listed markets, real estate investors may be able to tactically allocate at different times across the two asset classes, seeking to take advantage of how markets have priced in current conditions.”

Investors may see bright spots in private real estate for several years.

Against the backdrop of an average recession, the report's authors predicted that private real estate values could decrease by as much as 15%. While they viewed a severe recession as unlikely, they said it could potentially drive prices down by up to 25%.

After a few quarters of negative GDP growth, Cohen & Steers believes that the market is already in a "shallow recession."

According to Corl, investors who can capitalize on the current disruption in the real estate market will see favourable returns over the next two years.

The years 2023 and 2024 "will probably be very strong," he argued, "because of the big reset [in pricing]."

The value of real estate as an inflation hedge will not diminish, the report said, as sectors with shorter lease terms like hotels and self-storage can quickly raise rents to keep up with inflation. According to the report, these industries exhibit greater cyclicality and can act as a cushion against inflation.

Read more: How COVID and recession uncertainty are impacting real estate alternatives

In determining who succeeds and fails in various real estate sectors, technology will also be crucial.

As a result of technological advancements in recent years, Cohen & Steers points to data centres, healthcare facilities, and cell towers as "emerging secular winners."

Real estate in the Sunbelt and so-called surban areas are also new opportunities as people have relocated from some urban areas to less populated cities and suburbs across the U.S.

“It’s very difficult to paint the whole real estate market with a broad brush,” Corl said. “Some opportunities and areas are a lot less obvious [investments] than others.”