The next year could be a balancing act for investors in real estate, according to a 2019 Outlook published by the Wells Fargo Investment Institute.
The outlook, which has projected a number of long-term investment trends shifting, said that investment in private real estate would be unfavorable in 2019. "A lesson of the long U.S. expansion is that real estate supply and demand conditions eventually deteriorate, often as interest rates rise and negatively affect U.S. property capitalization rates and property values," the report noted.
It also indicated that real estate investment trusts (REITs) were likely to underperform compared to other real assets in 2019. The report noted that while REITs had outperformed over the past few years, they were facing two strong headwinds going into 2019. The first was an aging economic cycle and the second was rising long-term rates. Both these factors have slowed the performance of REITs.
"Some REIT fundamentals are beginning to show the signs of a maturing economic cycle such as slowing net operating income growth, peaking occupancy rates, declining demand for commercial real estate loans, and increasing sensitivity of REIT prices to higher interest rates," Wells Fargo said in the report.
The report also recommended ways in which investors could position their portfolios to prepare for these headwinds, calling for lower allocations for these assets.
Giving the economic and market forecast for 2019, the report pegged GDP in the coming year to fall slightly to 2.7 percent, even though it expected the "U.S. consumer price inflation to support the economy." The report said that three Fed rate hikes could be expected in 2019. Factors such as rising wages that would eventually slow job growth and the tax reform and federal government spending stimulus that was likely to pass its peak in 2019, were likely to moderate household and fiscal policy contributions to the overall economic growth.
Click here to read the full report.