How Will Stock Market Volatility Impact CRE?

In the last two weeks, volatility has returned to the stock market, dropping more than 500 points before rebounding. It is generally accepted that stock market volatility has little impact on real estate pricing, but it could have a trickle down effect, impacting business confidence that could hinder growth. At the moment, the stock market volatility hasn’t had an impact on commercial real estate pricing, but more minor declines in the coming year could start to have an impact.

“We looked at studies over the last 20 years comparing stock market performance to real estate prices, and they found that there is no strong correlation,” Tim Lee VP of corporate development and legal affairs at Olive Hill Group, tells GlobeSt.com. “From a high level view, there is no evidence to suggest that a stock market drop is going to impact real estate prices, particularly in commercial real estate. Part of that is because you have longer-term leases and businesses with more cash reserves that individuals. Having multi-tenant properties helps to weather the storms a bit better.”

While there is no official correlation, Lee says that if stock market swings hurt business confidence, it would have an affect on commercial asset specifically. Although there is no direct evidence, we have to see that there is some connection,” says Lee. “It does affect business owners’ confidence in terms of deciding to expand; it affects people who want to start a business; it has affects on businesses looking to expand internal investments. That does have a trickle down impact on commercial real estate.”

At the beginning of 2018, there was a significant 10% correction in the stock market that sparked forecasts of a larger correction sometime this year. Lee says the most recent drop is fueled by the geopolitical climate as well as the length of the growth cycle. “We are seeing things happen on the geopolitical stage that are causing investor nervousness, both in relation to the on-going trade dispute with China and now some of the tension with Saudi Arabia,” he explains. “However, in general, there seems to be a bit of profit taking. The Dow is up significantly in the past 12 months, and eventually that will cool off. Last week, I think that factors started to align and people saw opportunities to take some profit. The encouraging sign is that the market came roaring back. So, it looks like people are buying back in after the initial fears have gone away.”

While it is hard to predict, there will likely be more stock market volatility next year. “We expect to see more fluctuations,” says Lee. “With the exception of the correction at the beginning of the year and the one last week, it has been a fairly mild year. We aren’t seeing the turbulence that people predicted at the beginning of the year. If we continue to see swings in the next couple quarters, that could affect on business owners’ confidence, and we might see that have an impact on commercial real estate.”