Why RE Stocks Drop are Plunging But Not Real Estate

TruePoint Capital

The stock dropped 7.6% on Monday, marking its worst day since the 2008 financial crisis.

The plunge came amid a raging global oil-price war involving Russia and Saudi Arabia and continued panic from the coronavirus outbreak. The market dropped almost immediately after the opening bell.

The S&P 500 was down over 6 percent, and the Dow Jones Industrial Average plunged over 1,600 points, or 6.21 percent shortly after 10 a.m. This prompted a 15-minute halt in trading, as the New York Stock Exchange automatically stops trading if it detects severe drops to stop the bleeding. Trading resumed after that.

No industry was spared from Monday’s bloodbath – least of all real estate. REITs were down even more than the broader markets in morning trading. The FTSE Nareit, All REITs index, was down 6.24 percent. The price drops impacted every REIT sector, from hospitality to industrial to retail.

Non-REIT real estate stocks also took massive hits. Brookfield Property Partners’ stock was down 6.8 percent and CBRE down almost 7 percent.

Add this most recent Black Monday to the markets plunge of almost 3,600 points in a week two weeks back, and it’s clear Wall Street has been on a rollercoaster over the past several weeks, fueled mostly by coronavirus panic.

Is there cause to worry about the economic impact of the coronavirus? Sure.

Is the actual effect of the virus realistically reflected in the markets? No.

The markets are in overreaction territory.

​​To put the coronavirus in perspective, the flu accounts for 291,000 to 646,000 deaths worldwide and 12,000 to 61,000 deaths in the U.S. per year. As of March 10, 2020, approximately 4,087 deaths have been reported worldwide; 27 deaths in the U.S.

It appears that the market’s recent volatility is not based on any underlying rational economic basis.

Panic and overreaction fueled by headlines and social media are having far more effect on the markets than the actual disease itself.

So while real estate stocks have taken a beating in the past few weeks, what hasn’t taken a beating are real estate values themselves.

There are no headlines about free-falling real estate values. In a matter in just one month, the Dow has shed more than 19% of its value with REITs and real estate stocks pretty much mirroring the broader markets.

Can you imagine if real estate values mirrored the 19% drop in the broader market?

There would be pandemonium in the streets. So why is it that while the broader markets experienced historic sell-offs, the real estate market has held steady? It all has to do with liquidity.

The Stock Market’s liquidity is its Achilles heel – making it susceptible to huge swings in value because investors can unload stocks in droves at the click of a screen. And because investors can buy as little as one share of any one stock, investors have little to no attachment to their holdings and can part with them with indifference.

It’s this liquidity and detachment that indulges compulsive investor behavior in buying and selling on a whim fueled by fear and panic stocked by talking heads and social media clowns. 

While real estate stocks rise and fall with broader market sentiment, real estate values themselves are largely insulated from these swings.

And it’s for precisely the opposite reason that causes stock market volatility – illiquidity. Real estate is mostly illiquid. It can not be bought and sold on a whim or at the click of a screen. It’s this illiquidity that protects investors from themselves.

Commercial real estate is even more insulated from the broader markets than other types because most commercial real estate is owned through corporations and partnerships with long tie-up periods for their investors.

Private investment funds, for example, have investment windows of 5-12 years. This lockup period prevents investors from acting on impulses as investors do on Wall Street. This prevents mass selloffs in actual real estate holdings in contrast to the mass selloffs of real estate stock like what has occurred in the past few weeks.

Savvy investors understand real estate’s liquidity benefit from its lack thereof. They know that it’s this illiquidity that protects their investments from the volatility of the broader markets.

So, while the broader markets have lost 19% in value in less than a month, real estate values have remained steady. Savvy investors don’t abandon ship at the first sign of trouble. They understand that to maximize return on investment, they must be willing to play the long game and ride out any storms that might appear.

Tangible real estate offers certainty in a time of uncertainty.

While the uncertainty surrounding the coronavirus is dictating market madness right now, savvy investors cling to the confidence of tangible real estate – primarily commercial real estate – to deliver consistent cash flow and predictable appreciation even in a downturn.


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