Real estate is an essential part of the business cycle – sometimes it leads, sometimes it lags, but frequently it plays a major role in the contraction or expansion of GDP.
Our charts analyze commercial and residential real estate prices and how they interrelate with GDP in the past seven recessions.
Our benchmark for commercial real estate is the NAREIT index, which provides a public market valuation of a leveraged but broad composite real estate portfolio. Research indicates that REIT prices are the most informationally efficient of all real estate value benchmarks (Barkham and Geltner, 1995).
On the residential side, we employ S&P/Case Shiller to track price movements. Rebasing all three indicators to the same date, 2 quarters prior to a recession, we evaluate the lead and lag relationships. Each chart shows where the two real estate indicators bottomed out, compared to the bottom in GDP.
As shown, S&P/Case-Shiller is sometimes a coincident and sometimes a lagging indicator of the trough in GDP, but never a leading one. (Note that for several instances the S&P/Case-Shiller troughed at the base quarter, meaning it continued to rise while GDP declined. We group these instances as not having a relationship with GDP). On the other hand, securitized commercial real estate leads GDP five out of the seven recessions, normally by one quarter.
If investors anticipate GDP to decline the sharpest by the end of 2023, as we do, they should consider allocating to REITs in the next six months.
Reference: Richard Barkham & David Geltner, 1995. "Price Discovery in American and British Property Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(1), pages 21-44, March.