Real Estate – Can’t Touch This!

June 26, 2020 |
1 minute read

Few markets have been as heavily impacted by the onset of the global pandemic as real estate.  Real estate is considered a hard asset that “you can touch and feel”, but during a pandemic no one wants to touch or feel anything. Additionally, government restrictions on movements to and from physical locations and landlord recourse places a unique strain on the asset class. 

Leading up to the COVID-19 crisis, real estate markets remained relatively disciplined from a pricing and leverage perspective. Beginning the year, publicly traded REIT leverage levels were approximately 10 percent lower than in 2007 (the height of the previous cycle) and it seemed that investors got religion on the excessive use of leverage in both the public and private markets. Additionally, unlike the expensive relative pricing versus treasuries in 2007, capitalization rate (income divided by property value) spreads held firm near their longer-term historical average. 


In 2007, cap rates to treasury spreads were at their lowest level in the last 20 years.  In some sectors or geographies, spreads even went negative. Further, the ten-year yield stood above 5 percent before equities began to decline and at 4 percent when Lehman Brothers collapsed. At those levels’ treasuries represented a reasonable relative value investment for investors seeking to generate returns that achieved long-term objectives. Additionally, with real estate appearing relatively expensive, investors repriced the asset class — pushing cap rates up over 150 basis points and spreads back toward their average — contributing to significant declines in real estate values.

Today, the 10-year yield stands at approximately 70 basis points, hardly creating a relative buying opportunity for long-term investors seeking to achieve a 5 percent real rate of return or a 7 percent nominal rate.  Further, cap rate spreads are at their widest level in 20 years, which presents a relatively attractive investment opportunity for long term investors. We believe the combination of low treasury rates and attractive spreads will keep cap rates from expanding like they did during the Global Financial Crisis and serve to moderate declines in most sectors of the asset class.

Stay connected with the Insights Blog

Popular Blog Posts

Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

In Remembrance: Verne O. Sedlacek

A Gentle Giant The Commonfund community was shocked and saddened this week by the news of the sudden passing of our former President and CEO, Verne Sedlacek at the age of 67.
Investment Strategy | Insights Blog

What is an OCIO?

Outsourced investment management, once primarily a solution for small institutions with limited resources, is now used by a broad range of long-term investors. When properly implemented, outsourcing...


Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.