While an ever-increasing risk of recession has sent broad markets into disarray, private equity commercial real estate has been more resilient. The sector mix within the asset class will continue to offer investors diversification amid fears of further market pullbacks, with industrial and residential property types likely leading the charge.

Commercial real estate returns by property type
Total return, 3-month annualized vs. 1-year, relative to inflation

Scatter plot displaying commercial real estate returns by property type by total return, 3-month annualized vs. 1-year, relative to inflation

Source: NCREIF NPI, Federal Reserve, Principal Real Estate Investors. Bubble size represents market value. “All property types” represents average value for all property types. Dashed lines denote annualized inflation as of May 2022. Data as of May 31, 2022.

The Federal Reserve’s increasingly hawkish stance, culminating in their decision to raise policy rates by 75 basis points in June, has increased the risk of U.S. recession within the next 12 months. While this has led to a steep spike in volatility and disrupted public markets, private equity real estate is yet to see a material dislocation.

Through Q1 2022, the NCREIF Property Index registered a 21.9% total return on a four-quarter trailing basis, far outpacing inflation. The fundamental growth story of the residential sector in commercial real estate means that the asset class should deliver positive returns through the rest of 2022.

For investors concerned about the risk of further broad market pullbacks, the sector mix within commercial real estate should continue to offer portfolio diversification. In the last year, the industrial sector clearly outperformed the broader market, as a result of a resurgence of trade and strong leasing from major e-commerce players. Going forward, there’s likely still some room to run for the residential sector, as rental units continue to see strong demand amid an overpriced single family housing market.

As multi-decade inflation highs continue to wreak havoc on the economy, private equity commercial real estate offers investors the prospect of positive real returns—an opportunity that may be sorely lacking in many segments of the broad public market.

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