Real Estate Soars As The Stock Market Slides
Although it’s a bit early to tell because not all of the numbers have been tabulated by the major commercial real estate brokerages firms, from the initial results that have been posted, real estate has experienced another solid year of growth while the stock market has had another year of lackluster performance.
As the New Year rang in, stock market pundits were hoping that the S&P 500 and the Dow Jones Industrial Average could at least show positive gains over the previous year. Unfortunately, their hopes were dashed. The S&P 500 started 2015 at 2,058.90 and ended the year at 2,016.71, a decline of 2.05 percent. The Dow Jones Industrial Average started the year at 17,823.07 and ended the year at 17,158.06, down 664.41 points for a decline of 3.73 percent.
Frankly, it was lucky that the two major indicators of stock performance ended as close to where they began as they did. There was a period of time in late August 2015 when the S&P 500 was down by more than 9 percent from where it began at the first of the year. In May 2015, there were a few days when the S&P 500 showed signs that it may be making some progress when it climbed up to 3.5 percent, but then quickly faded as the dog days of summer pressed on.
The Dow Jones Industrial Average had an even worse showing in spite of the fact that the DJIA is based on only the best long-term performers. In August, the DJIA fell to a low of 15,666, a decline of more than 12 percent from its January, 2015 beginning. Its high was in May 2015 when it climbed by 2.75 percent above where it started at the beginning of the year.
For investors, these stock market results are even more abysmal, especially for retirement accounts. Most retirement accounts are controlled and managed by the major stock brokerage and financial planning firms. For an investor to achieve a positive return, they not only have to overcome the poor performance of the stock market itself, but they also have to overcome the fees that are charged by those managing their accounts.
Active managers take fees of 3-to-5 percent of the total value of their investment funds. Then the financial planners who work directly with their investor clients take another 1 percent as an asset management fee right off the top. Finally, the companies who administer their employee’s 401(k) programs take an administrative fee. No wonder investors who put all their eggs in the stock market are feeling the pinch!
The real estate market, on the other hand, appears to be having another stellar year. Rents have continued to rise in most of the major markets. For apartments, the average has been about 6.5 percent. Office rents have grown by an average of 3.35 percent and retail has moved up 2.45 percent. In addition to rents increasing, vacancy rates have either held stable or declined making the gains in net cash flow even more impressive. The hospitality and industrial markets also show impressive gains, but the overall results have yet to be tabulated.
The 2015 results for residential housing were less impressive than the results for commercial real estate, but the gains were still solid considering the shape of the economy. Even though the National Association of Realtors reported a slowdown in existing and new home sales in November, 2015 of 10.5 percent and 2.7 percent respectively, the median existing price of an existing home was up 6.3 percent in the year-over-year results from $207,200 in November 2014 to $220,300 in November 2015 and, according to the National Association of Home Builders, median new home prices were up slightly in November, 2015 by 0.8 percent over November, 2014, from $302,700 to $305,000.
All of this bodes well for investors who invest part of their discretionary or retirement money in real estate rather than putting it all in the stock market. One cautionary note, however, when you visit with your stockbroker or financial planner and tell them that you want to diversify into real estate, don’t let them talk you into investing in a Real Estate Investment Trust (REIT) rather than investing directly into real estate itself. REITs are a form of stock. They are subject to the same market volatility as any other stock. Instead, invest directly in real estate. In these days of sluggish stock market performance, buy a tangible real estate asset rather than a piece of paper. It’s not only the safest way to go, but also the most profitable for building true financial wealth.
ABOUT THE AUTHOR
Ken has been in the real estate business for over 40 years and has personally overseen the development and management of over $350 million worth of assets. Ken holds a B.S. degree in Accounting from Brigham Young University, a MBA from the University of Utah. Licensed real estate broker since 1976. He holds the following designations: CCIM, CPM, CRS,CCA. Served as the president of the Utah Apartment Association.