Investor interest in real estate has grown as low interest rates have coincided with challenges in the equity markets. Real estate offers an attractive income return relative to other asset classes. It can be seen as a stand-alone asset class, or as part of an alternative asset class allocation offering diversification to one’s investment portfolio. Institutional and private investors have returned to real estate as an asset class after their bad experiences in the early 1990s. While that was a very difficult time for the real estate industry, the supply side fundamentals have changed, and there has not been rampant development without leasing commitments, which led to the savings and loan failures. The demand side has weakened during the current economic correction, but the supply side is under control, preventing the valuation collapse of the early 1990s. The private investment predecessor of Crimson Capital invested over $75 million since the early 1980s throughout changing markets. Such a foundation well positions Crimson Capital to continue to invest and develop income-producing properties with appreciation potential.
The low correlation between real estate and fixed income and equities allows real estate investors the opportunity to buffer the overall volatility of an investment portfolio. Real estate offers investors alternative assets in their portfolios to provide performance when traditional asset classes are wavering. Real estate is a labor and time intensive investment class and is typically only a small portion of an investor’s total investment portfolio, thus it is not prudent to spend the time required to place private investments in real estate. Crimson Capital currently owns greater than 50% of the equity value of its existing 500,000 square foot portfolio and was developed as a self-interested real estate investor. This unique attribute offers investors the chance to co-invest in direct real estate alongside Crimson Capital’s own equity, perfectly aligning the incentive to maximize value for all investors in every transaction.
Why invest in real estate right now? Diversification and current relative value. Interest rates are at the lowest level that we have seen in our lifetime, and the equity market is volatile and can be considered fully valued based on current P/E ratios. In this environment, core real estate represents an income-generating vehicle that retains upside potential in the event of an economic recovery. Yields in core real estate remain consistently above the yield on investment grade bonds, which is the right relationship in a world of low inflation. Part of the risk premium real estate should generate needs to come from providing a yield above a bond, with the total return being completed by an inflation like capital gain component.
Are we in a real estate bubble? No. In certain single family housing markets prices have outstripped personal income growth, which cannot be sustained over the long term, but in the commercial arena, values have essentially matched inflation since 1995, making it hard to claim that there is a systematic asset pricing bubble.
