NEW YORK CITY—This past month has been a wild ride for the stock market. On October 15th, the Dow dropped 450 points, which was the largest drop in three years. It then bounced back 263 points on October 17th for this year's second highest gain. Fear of global economic instability and even Ebola were initially to blame, but then strong corporate earnings offset some of these losses later. Clearly, this volatility has been concerning to investors across the globe, but how does this instability affect real estate values?

What first comes to mind is that these recent events are a positive for real estate values. During uncertain times, investors will often retreat from the public markets and search out safe havens such as treasuries and hard assets. Real estate, unlike gold and other commodities, has the unique distinction of having cash flow, in addition to the potential for appreciation.

An additional short term benefit for real estate is that US treasuries have moved lower as a result of this displacement, thus interest rates have also dropped, giving another boost to value. Due to the fragile global economy, many have said that rates will stay at their same levels through next year.

Meanwhile, for the longer term relationship, it has been demonstrated that there is little or no correlation between the stock market and real estate directly owned. REITs do tend to track with the public markets, but have outperformed the S&P 500 by 65% since 1987.

With the help of my team's analyst, Matt Tarpley, we researched this correlation, or lack thereof. We were surprised to find few studies on it. This is despite the fact that the top 10% wealthiest individuals have 35% of their net worth held in non-residence real estate investments versus 40% in stocks and bonds.

The 2013 study on “The Co-Movement and Causality between the U.S. Real Estate and Stock Markets in the Time and Frequency Domains,” by Chang, Xiao-Lin, Miller, Balcilar, and Gupta used a wavelet analysis to conclude that there is a low correlation between the U.S. real estate market and the stock market. They determined that the two markets respond directly to economic fundamentals and structural changes instead of each other.

Similarly, Fu and Ng's, “Market Efficiency and Return Statistics: Evidence From Real Estate and Stock Markets Using a Present Value Approach” study in 2000 showed that real estate pricing absorbs only half of what stock prices do when new information is released. They found that real estate is more directly correlated with industry related news, bringing about slower price adjustments and thus less volatility.

Tarpley summarized his findings by making the case that the inherent inefficiencies of the real estate market lead to great arbitrage opportunities. Simply put, an investor can peg the value of a stock at any time, whereas real estate values are only recorded on sale. Buyers can only speculate on the perceived value of a property. As result, there are examples of owners selling property each year where the full proceeds were not realized, proven shortly thereafter on resale.


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James Nelson

James Nelson is a Principal and Head of Tri-State Investment Sales in Avison Young’s New York City office.

Since Nelson’s start in the real estate industry 19 years ago, he has played an integral role in the New York City real estate market. He leads a team of professionals in a variety of client service offerings, including asset disposition, asset recapitalization, market research and financial analysis. His proficiency and capability is unmatched in all aspects of the acquisition and disposition of investment-grade real estate, as well as development and redevelopment transactions, on behalf of both institutional and private capital clients across all property types.

Prior to joining Avison Young, Nelson most recently served as Vice Chairman of Cushman & Wakefield, where he ran a successful investment sales team that marketed over $1 billion in deals in New York City and throughout the country over the past two years alone. He was also ranked as the number one Investment Sales broker at the firm nationwide in 2016. Prior to joining Cushman & Wakefield, Nelson was a partner and top producer for Massey Knakal for six of their last eight years and was named the company’s youngest partner in 2004. While at Massey Knakal, James was involved in the sale of over 400 properties and loans with an aggregate value of over $3.8 billion.