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Commercial Real Estate Assets in Manhattan: One of the Most Attractive Investment Options

November 01, 2016 - NY Real Estate Market

Author : Prodigy Network

People often perceive the real estate market in the United States, and particularly New York’s, as a great investment option. However, very few people know with certainty if this is true, and even more importantly, do not know the reasons why it is a good investment option, because, in fact, it is.

Prodigy Network has been analyzing, from 2000 to date, the monthly transaction data of commercial assets in New York, so as to understand its returns’ performance. In the analysis, we compared this type of investment with other investment options, such as the Dow Jones Index, the Nasdaq and REIT indexes, including commercial asset returns in other cities of the United States. The study allowed us to confirm that investing in commercial real estate assets in Manhattan is a great decision, because the returns for these type of assets showed to be consistently better than those of any other investment during the analyzed period.

The graphic below shows the performance of price indexes, between December 2000 and December 2015, comparing Manhattan’s commercial real estate market along with apartments, the REIT (Real Estate Investment Trust) and the United States stock market. The data shows how the Manhattan market stands out from the other two investment options.

Performance of Manhattan Real Estate Assets (CPPI) vs. the U.S.A. Stock Market (composed of the Dow Jones and Nasdaq Indexes) vs. the REITs Index



* Index base begins at 100 as of December 2000

This study allowed us to factually verify two important features of these type of assets: 1) Manhattan’s resilience is higher than that of the other markets; and 2) it shows a low correlation with the United States’ stock market.

  1. Resilience: This feature is defined as the capacity to recover after a change. In the world of investment, resilient assets are those that, after a crisis, a price depression, or any similar episode, have the ability to recover and go back to their previous state, and even surpass it.

New York’s real estate market is said to be highly resilient, but why is this so?

The outstanding resilience of Manhattan’s commercial real estate market becomes evident upon comparing its performance to other markets, in terms of impact and recovery, after the 2008 financial crisis.

  •      Against the United States’ stock market: Manhattan’s commercial real estate market fell 34% less than this market, and recovered 18% faster.
  •      Against the United States’ national real estate market: Manhattan’s commercial real estate market fell 16% less than this market, and recovered 35% faster.
  •      Against the commercial real estate and apartments market in United States’ mayor cities: The commercial real estate market in Manhattan fell 22% less than the markets in Chicago, San Francisco, and Los Angeles; it recovered 37% faster than Los Angeles, 15% faster than San Francisco, and 50% faster than Chicago.
  1. Correlation and Volatility

Volatility indexes help measure the return’s deviation, based on its historical average; a low index is synonymous of stability. The following chart shows the volatility of different markets from December 2000 and July 2016:

Index Annualized volatility
Manhattan’s commercial real estate market 6.5%
S&P 14.8%
Dow Jones 14.36%

According to this data, Manhattan’s commercial real estate market has shown a volatility 60% below the stock markets’ indexes; in other words, it has had a much more significant stability than that of the Dow Jones and S&P indexes.

Correlation, on the other hand, which quantifies the relation between two types of investments, shows that Manhattan’s commercial real estate market manages to keep away from the stability level of these stock markets, with a correlation of 0.13.1

Both these correlation and recovery figures show that investment in Manhattan’s commercial real estate market is more stable than that of the aforementioned markets. This conclusion becomes even more relevant in the current situation, which has been marked by volatility and uncertainty. A situation in which experts recommend diversified portfolios, with high-stability investments that may protect the capital from the unexpected movements of risky investments, in response to the “Fly to quality” phenomenon, which encourage investors, in times of uncertainty, to move their capital from risky investments to those that are more stable and secure.

1. The correlativity index grants a maximum of +1, when investment prices are amended in a parallel fashion, and -1, when prices go in opposite directions.

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