Why Residential Commercial Real Estate Looks Attractive in 2025
As we step into 2025, the valuation gap between stocks and real estate has reached historic levels, creating unique opportunities for investors seeking value. While the S&P 500 continues to trade at approximately 22 times forward earnings, far above its historical average of 17x, commercial real estate prices have declined by over 20% in the past two years. This disparity is difficult to sustain, especially if mortgage rates start to ease. Let’s delve into the key reasons why residential and commercial real estate stands out as a promising investment this year.
1. Stocks and Real Estate Valuation Gap
The sharp divergence in performance between stocks and real estate is unprecedented. Stocks have surged over 50% in the past two years, while commercial real estate values have plummeted. For instance, apartment values have dropped to levels reminiscent of the global financial crisis despite today’s stronger economic fundamentals and healthier household balance sheets. This disconnect makes residential commercial real estate a compelling investment, as history suggests prices tend to rebound sharply after significant declines.
Investors today can take advantage of this opportunity by exploring residential real estate funds, which offer exposure to discounted properties. Unlike in 2010, when individual investors faced significant barriers to entry, modern platforms allow for easier access to this asset class.
2. Broken Correlation Between Stocks and Real Estate
Historically, the performance of stocks and commercial real estate has been closely correlated, as both asset classes reflect broader economic conditions. From 2012 to 2022, their movements were largely in sync. However, since 2022, this correlation has weakened, presenting a unique opportunity for investors who believe in mean reversion.
In the event of a recession, real estate could outperform stocks as investors seek stable assets. This potential shift underscores the importance of diversifying investment portfolios to include undervalued real estate assets.
3. Looming Housing Undersupply
One of the most pressing issues in the housing market is the growing undersupply of homes. Elevated interest rates since 2022 have significantly slowed new construction, even in builder-friendly markets like Austin and Houston. According to Costar, new housing starts in Houston have plummeted by 97%.
Experts believe the oversupply from the 2021 building boom will be fully absorbed by the end of 2025, if not sooner. Thissets the stage for a housing shortage, which could drive up rents and property values. For investors, this trend highlights the potential for long-term gains in residential commercial real estate.
4. Low Risk of Accelerating Inflation
Concerns about inflation remain prevalent, particularly with the potential policy changes under a Trump presidency. However, historical data suggests that inflationary pressures may remain subdued. During Trump’s previous term, robust economic growth and tax cuts did not result in significant inflation until the pandemic.
Additionally, demographic trends, such as declining birth rates and slower population growth, point to a long-term deflationary environment. These factors provide a favourable backdrop for real estate investments, which tend to perform well in stable or deflationary conditions.
Investing in Residential Commercial Real Estate for the Long Term
For value investors, the disconnect between stock valuations and real estate presents a unique opportunity. After the S&P 500’s strong performance in 2023 and 2024, it’s challenging to envision similar returns in 2025. In contrast, residential commercial real estate offers a chance to invest in undervalued assets poised for recovery.
Platforms like Fundrise have made it easier than ever to invest in commercial real estate, with low minimum investment requirements and accessible tools for dollar-cost averaging. With approximately $300,000 already invested in residential commercial real estate, the potential for long-term growth appears promising.
Final Thoughts
As the valuation gap between stocks and real estate widens, savvy investors have a rare opportunity to capitalize on undervalued residential and commercial properties. With favourable demographic trends, a looming housing undersupply, and the potential for mean reversion in asset correlations, residential and commercial real estate is well-positioned for growth in 2025 and beyond. For those willing to look beyond traditional equities, this asset class offers both stability and significant upside potential.
Disclaimer: This information is for general knowledge and informational purposes only and does not constitute financial, investment, or other professional advice.