Real Estate Likely To Outperform ‘Safe’ Investments In Next Recession, Says New Analysis

Skittish investors are piling money into risk-free money market funds, high-yield savings accounts and short-term U.S. Treasury notes amid a shaky economy that threatens to turn recessionary. But a Chicago-based investment firm released research indicating real estate offers historically higher and just as stable returns in troubled economic times.

Private real estate isn't traditionally perceived as a safe investment on par with, say, money market funds. But an analysis by Origin Investments found that since 1990 and over three economic crises — the recession of the early 1990s, the dot-com bubble burst after that and the Great Financial Crisis of 2007-2008 — real estate returns held up better than other investments historically seen as low-risk.

Real estate generated a 5.9% annualized return over seven- to 10-year windows that included recessions versus a 3.8% annualized return for Treasurys over the same time frame, according to Origin Investments Vice President Vince DeCrow, who led the analysis.

“I'm hearing from all of our investors, ‘Hey, I’m sitting on my cash, putting it in Treasury bills, getting 5% risk-free, playing a wait-and-see game, and was like, ‘OK, well, let's see if that actually makes sense,’” De Crow said, adding the results did not surprise him, though some investors need convincing.

“The whole point was to acknowledge, investors are scared. They've taken the risk-off approach. And to speak to that from a thought leadership standpoint … I just wanted to actually visualize it with real data.”

About $196B poured into money market funds in Q1 2023, more than any period since 2007, as risk-averse investors sought safer places than the stock market and real estate to park their cash, The Wall Street Journal reported.

But DeCrow said investors are missing an opportunity to put their money to better use. Traditionally risk-free investments reaped seven- and 10-year returns of 4%, lower than inflation, which was running at 5% as of March.

Origin’s analysis was based on historical returns gleaned from data from the National Council of Real Estate Investment Fiduciaries and the Treasury Department. Since January 1990, the annualized return of rolling two-year Treasury notes was 3.24% versus 7.6% for the NCREIF’s Open Ended Diversified Core Equity Index Fund, or NCREIF-ODCE, a standard industry benchmark.

Over the three seven-year periods that included recessions, private real estate generated a 5.9% annualized return versus a 3.8% annualized return for Treasurys. Over 10 years, returns were about 5.6% annualized for real estate and 3.5% for Treasurys. Origin is predicting a recession by October 2023.

“There's certainly value in being able to earn 4% or 5% risk-free, right?” DeCrow said. “Don't do it if you're looking to grow your wealth and do more than just protect it from inflation, which is higher than the risk-free rate, and you've got a long-term horizon, call it seven to 10 or more years. My advice would be to think long-term, right, and look at the conviction of history that suggests there will be ups and downs in any market cycle.”