Real estate has navigated a tough year, but the latest data indicates the beginning stages of a shift that could benefit early investors. Our analysis of recovery indicators and data supporting early investment suggests it may be time to start thinking about increasing allocations today to position well for the next cycle.

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It is no secret that real estate performance has been challenged in recent quarters. A classic supply-demand imbalance has added pressures to already-strained capital markets, spurring some investors to seek a reduction in their exposure to the asset class.  

While there may be larger policy-related reasons to rebalance, we think now is an opportune time to start thinking now about increasing allocations to gear up for the early stages of the next cycle. Hindsight is often 20/20, and investors may end up wishing they had “gotten back in sooner” when looking back to today’s buying opportunities.

Cyclical Opportunity 

The saying goes “history may not repeat itself, but it often rhymes.” For real estate, that has tended to show itself in a logical set of phases (Figure 1). Today, most would probably agree we are in the trough. Whether we are at the beginning or end is more hotly debated and depends on how much further you think values need to fall before reaching a bottom and how long it will take before they start their climb back up. 

History suggests that it is in the early quarters of the recovery where the highest returns may be achieved. We need only look back to what was arguably one of the worst real estate downturns in modern history during the Global Financial Crisis to see this play out. 

Though the recession ended in 2009, real estate fundamentals did not begin to turn the corner until 2010. Investors who anticipated and identified these turning points and got out of the gates earlier in the recovery (in this case, 2011 through 2014) achieved stronger returns than those whose deployment didn’t start until improvement was well under way and generally firmer (2015-2018) (Figure 2).

As Figure 2 shows, investing earlier has yielded stronger returns. Those funds with investor capital to put to work earlier were able to acquire properties at their reset values, providing a more attractive basis from which to ride the wave up as fundamentals strengthened. Purchase price is important when it comes to returns –buying low and selling high is generally regarded as sound advice.

How Do We Know We’re Recovering? 

There is a lot to consider when trying to identify cyclical turning points in real estate. At ARA, we believe there are three key areas (covering 13 unique metrics) that provide a barometer of the state of the market at any given time. These three categories are pricing, liquidity, and fundamentals. 

Comparing today’s conditions relative to those in the early quarters coming out of the GFC shows that these metrics are beginning to come up from their bottom, just as they did in late 2009.

While the natural inclination is to “wait for the bottom” before investing, it is extremely difficult to time when that is and getting commitments approved and funded afterwards takes time. A more practical and advantageous approach may be to start exploring new and add-on commitments when things move into their last leg down, so that when fundamentals and capital markets start to turn, funds can be invested earlier. Since indications are that we may be nearing the end of repricing and approaching the beginning of a new cycle, that time may be sooner than you think.

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Disclaimer

The information in this newsletter is as of April 19, 2024, and is for your informational and educational purposes only, is not intended to be relied on to make any investment decisions, and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments in any jurisdiction. This newsletter expresses the views of the author as of the date indicated and such views are subject to change without notice. The information in this newsletter has been obtained or derived from sources believed by ARA to be reliable but ARA does not represent that this information is accurate or complete and has not independently verified the accuracy or completeness of such information or assumptions on which such information is based. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce. Past performance of any kind referenced in the information above in connection with any particular strategy should not be taken as an indicator of future results of such strategies. It is important to understand that investments of the type referenced in the information above pose the potential for loss of capital over any time period. This newsletter is proprietary to ARA and may not be copied, reproduced, republished, or posted in whole or in part, in any form and may not be circulated or redelivered to any person without the prior written consent of ARA.

Forward-Looking Statements

This newsletter contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements are statements that do not represent historical facts and are based on our beliefs, assumptions made by us, and information currently available to us. Forward-looking statements in this newsletter are based on our current expectations as of the date of this newsletter, which could change or not materialize as expected. Actual results may differ materially due to a variety of uncertainties and risk factors. Except as required by law, ARA assumes no obligation to update any such forward-looking statements.