Market shifts and periods on uncertainty are an unavoidable part of the investment lifecycle. While it is impossible to predict exactly how these events will impact the commercial real estate and alternative investment markets, it is certain that some assets are able to withstand these periods better than others. When faced with the potential of declining portfolio performance and values, many investors’ initial response is to want to back out to protect their investments from the potential of further market declines. However, during times of market volatility, focusing on short- and long-term strategies, reassessing a portfolio’s tolerance for market risk, and identifying opportunities to diversify the portfolio through asset allocation are all strategic moves that should be considered.
Read ahead to learn about 4 assets that have historically performed well during market downturns and why they should be considered a means to diversify your investment portfolio.
The self-storage sector is considered to be one of the most stable forms of commercial real estate investments because of its reputation for providing relatively high yields and lower declines and default ratios in comparison to other asset classes. Today, there are more than 50,000 self-storage facilities in the United States, driving $38 billion in industry revenue annually. Nationwide, self-storage facilities are expected to see a 2%-4% growth in income over the next few years. Additionally, the minimalist trend, driven by Millennial’s economic dilemmas and shifting values, has and will continue contributing to the stability of self-storage facilities. As fewer members of younger generations are able to afford large homes with additional space and considering that 1 in 4 Americans has a clutter problem, self-storage demand shows no signs of slowing down any time soon.
For investors seeking to diversify their portfolios, as many are during times of uncertainty, this asset class has a proven history of remaining strong, even in the midst of a downturn. For example, during the 2008 recession, it was the only real estate sector that maintained positive growth. While the NAREIT All Equity Index lost almost 40%, self-storage REITs had a return of 5%, including dividends. Self-storage properties are able to remain stable even during an economic downturn because the demand for extra space is largely based on life events, such as marriage, divorce, home renovations, or relocations. Additionally, storage facilities tend to have “sticky tenants”, meaning that tenants are unlikely to relocate their belongings even if rent is less expensive elsewhere, largely due to the amount of time and effort required.
Medical Office Buildings
Medical office buildings have increasingly become a popular niche within the healthcare real estate industry. In fact, over the last two decades the number of medical office buildings increased by 40% and occupancy rates have not dropped below 90% since 2009. With impressive stats like these, investors are drawn to the stability of this cycle-resistant asset and its positive forecast for a continuously strong market performance. Additionally, investors are attracted to medical office buildings’ predictable revenue streams and minor vulnerability to reimbursement and regulation changes.
Medical office buildings become an even more attractive investment alternative during market shifts because, unlike other industries, the demand for healthcare and treatment facilities remains ongoing. This consistent demand helps to insulate medical office buildings against market volatility – especially as people begin to seek medical providers who offer convenience and flexibility.
The senior housing market is evolving and maturing as seniors look for living options that cater more to their lifestyle rather than solely accommodating the nature of their aging. Seniors in the United States are retiring at a staggering rate with an estimated 10,000 Baby Boomers turning 65 years old daily and a prediction that by 2040 more than 80 million people will be over the age of 65. As the number of seniors increases, so will the demand for places for them to live.
The resiliency of the senior housing sector has driven this asset to be considered reliable during market shifts. As a stable asset class, the senior housing sector does not correlate strongly with any particular economic environment, nor does it heavily depend on a rising real estate market. This is a key reason the senior housing sector has consistently outperformed during market shifts. In fact, over the past 10 years, senior housing has generated annualized total returns of 14.7% versus 8.1% for traditional apartments and 8.4% for commercial property types according to the National Council of Real Estate Investment Fiduciaries (NCREIF).
Nationwide, a growing number of renters are using 30% or more of their income to pay for housing. As a result, there has been a surge in the number of individuals and families in need of affordable housing. When the market shifts, even more people begin to gravitate towards affordable apartment units to take advantage of lower rents and to escape the cost and labor upkeep associated with homeownership. For investors, affordable housing can provide risk-adjusted returns that consistently exceed the market-rate performance. Additionally, because of the severe lack of affordable housing across the nation, affordable communities have measurably high occupancies and low turnover, which increases a property’s net operating income (NOI). While the average market-rate multifamily community has an average turnover rate of 50%, affordable portfolios consistently maintain occupancy rates of approximately 98% or higher – a figure that is not likely to decline due to market shifts.
Market volatility is an inevitable component of investing in a fluctuating market. Because there is no sure way to pinpoint when a market downturn will occur, maintaining a diversified portfolio of stocks, bonds, and real estate investments is strategic way to prepare for market shifts. With today’s current market situation, considering assets that have a history of stability is a strategic way that investors can reassess their investment strategies and position their portfolios to optimize performance.
You may also be interested in 3 Ways Real Estate Investors Can Prepare for a Recession.