The bond market has been behaving abnormally amid the recent volatile economic and financial market cycle.
Typically, when the stock market falls and money moves to safety, bond prices go up and Treasury yields fall, according to John Chang, national director of research and advisory services at Marcus & Millichap. However, when President Trump announced a roster of tariffs earlier this month, prompting a precipitous stock market dip, the demand for bonds also eroded, and Treasury rates increased.
“Experts have indicated that this, together with the fall in the dollar value, suggests that international investors may be shying away from U.S. investments,” said Chang. That begs the question of where capital will go when both the stock and bond markets are volatile, especially as recession and inflation risks are rising. Some view gold as a haven, and others are looking to cryptocurrency. Typically, hard assets like commercial real estate have been viewed as a good investment option in times of uncertainty. Still, each type of investor will likely behave differently this cycle, said Chang.
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Over the past 15 years, direct international investment has made up about 11% of total CRE buyer activity. Still, if experts are correct and global investment in the U.S. is tapering, fewer foreign investors may want to acquire U.S. commercial real estate.
REITs traditionally make up about 13% of the buyer pool, but their activity is often aligned with their stock valuations, which have been impacted by recent volatility.
On average, institutional capital has made up about 26% of the real estate buyer pool. In addition to adopting a more cautious stance given the market’s volatility, these investors operate on an allocation model that rebalances when portions of their portfolios, including real estate, gain or lose value. Chang said this could result in investors selling some of their commercial real estate to realign to their target percentages.
The largest buyer pool is private investors, who tend to behave differently than institutions during times of uncertainty. In 2020 and 2021, private investors made up 52% of CRE buyer activity. In 2022, that percentage grew to 59%, and by 2023, it went up to 61% as interest rates rose.
“In a climate of uncertainty and financial market volatility like we currently face, I suspect private investors will be the most active buyers in the market,” said Chang. “Of course, commercial real estate will undoubtedly face challenges in the coming year, especially if there's a recession, but real estate prices have recalibrated since 2022, and the combination of positive demographics and falling construction levels positions this sector to strengthen over the long term.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
