In 2006, the housing market was booming, but shortly after its peak, the bubble burst and the market dramatically crashed. Commercial real estate certainly took a blow during the recession, but never as volatility as the housing market. In fact, some experts predict the commercial real estate market may always be more stable than the housing market because of greater market transparency—thanks largely in part to Real Estate Investment Trusts (REITs).
REITs help to reduce speculation in the market, and speculation is part of the perfect storm that led to the housing market plummet. A study in the Journal of Portfolio Management cited that, “REITs increase the transparency of the real estate market, allowing investors to spot overvaluation or undervaluation quickly. If a big construction project is announced in, say, Los Angeles, and REIT prices fall, that’s a signal to other builders and lenders that L.A. could be getting overbuilt.”
Supporting evidence of this theory is seen in the commercial construction industry. When REITs have a greater market share, creating more market transparency, overbuilding and underbuilding are less prevalent. To further back their theory, researchers Frank Packer, Timothy Riddiough, and Jimmy Shek, held the cost of buildings and the cost of construction constant, and still found the same results.
REITs can help us monitor and gauge the market, but there is not yet been a perfect model to forecast commercial real estate. Using market insight, years of expertise and analytics, the Intelica Capital Transactions Group (ICTG), which specializes in asset management and REITs, can help you make a sound investment in the market. Talk to us today.