“We keep a close eye on consumer sentiment trends."
The most powerful predictor of real estate returns may not be what you think. It’s less about what people think, and more about what they feel.
The most sophisticated acquisition guys (they were all guys at the time) used to fly in, tour a property and then sit in their rented car in the parking lot, consult their HP-12Cs, and figure out their price. We Haystack editors came up under these guys, with their quick math and expert intuition. They were great mentors but buy and sell decisions aren’t made in parking lots anymore.
We've been taught that sophisticated real estate investing means managing complex financial models and finding an edge so you buy and sell at the right times. Institutional real estate investors typically seek information on supply (permits, starts, completions, etc.) and on demand (migration, economic growth, household formation) to inform these decisions. Larger investors all have analytical models that factor in economic, demographic and MSA-specific data. That feels appropriate, but since what we do is still a young science, part of the institutionalization of real estate investing is seeking other meaningful, if less intuitive, drivers of returns, and factoring those into the models and investment decisions.
Well, here’s some surprising science on what drives returns: Research indicates we should be paying attention to what consumers are thinking because, per economist Zhi Dong, “the total return of commercial real estate is better explained by consumer sentiment than by macroeconomic indicators.” That feels like a new idea - it was new to us - although other studies have barked up similar trees. A different study also focused on overall drivers of returns in private real estate noted early on that one of their “most important” findings was that one of the fundamental drivers of value for commercial real estate was the growth rate in real per capita consumption - a metric that historically has largely moved in sync with sentiment.