A Critical Step For Real Estate Investors: Check Past Predictions

December into January is its own special season for many industries, including commercial real estate investing, but also any other type where someone wants you to trust them with your money.

‘Tis the season of predictions and forecasts. Experts come up to your door like a tardy caroling group, come around to offer their vast expertise. There’s one problem, though. It’s hard to know who might be right. Not that even real experts are always correct, but you want a sense that people aren’t off in their own worlds like some fund managers, television personalities, and other prognosticators have appeared to be over the years.

It’s not that this time of year is the only one in which augury and other forms of divination take the stage, but it is a prominent marking time. Many advisors, vendors, market research firms, and others, lay out their visions. It isn’t for an industry competition or bragging rights (although they can exist). These are sales tools, and not unreasonably so.

If you’re considering some person or institution as a significant aid to your commercial real estate investment — or any other — there is an important step in your vetting process. Look at what they’ve said before and see how close they were to what eventually happened.

An example is independent broker-dealer LPL Financial, which created a backward look at their calls for 2024. Here are some of the hits and misses they noted on their own predictions:

· They were right in saying to stay fully invested (which is, frankly, a pretty common piece of advice for good reasons). Given the concerns about a recession risk at the end of 2023, it would have been easy to say pull back. But staying invested, in equity markets was correct.

· But they didn’t perfectly foresee the above. “The maximum S&P 500 drawdown into the August low reached 8.5%. With the benefit of hindsight, this would have been an opportune time to dial up equity market risk to overweight, a profitable trade we contemplated but ultimately missed.”

· They correctly called for growth over value. The former outperformed the latter by 19 percentage points.

· They also called for being heavy on communication services (a 40.2% return) and lighter in real estate (a 5.2% gain).

· Their S&P 500 target price was too low. They started with 4,900 on the high end and boosted it partway through to 5,500. That wasn’t nearly high enough. They didn’t expect the price-to-earnings expansion (they looked for 19 to 20 and it came in at 22) because of higher interest rates (presumably because an investor would need a higher return to compensate for the higher cost of money).

· In fixed income, there was a volatile year for the 10-year Treasury yield between 3.62% and 4.71% and the 2-year between 3.50% and 4.04%. Coupon income was partly offset by interest rate moves. They were right in saying there were good possibilities in fixed income, but they say they may have been too in favor of the preferred securities asset class.

· They “underestimated the ongoing resilience in corporate credit markets — both investment grade and high yield” because they expected a recession that didn’t come. Additionally, the firm didn’t invest enough in high-yield bonds and loans, which were up 8% over the year. And spreads for both high-yield and investment grades have been at or near lows. They still think the markets are too expensive, meaning there should be higher upsides.

It’s an example from one firm and something reasonable to expect from any advisor as a foundational brick in transparency and accountability. Firms not doing this aren’t necessarily ones to avoid, but it does mean you have more work to check back on what they said at the end of 2023 or the opening of 2024 and compare them to how markets did last year.

This is also an exercise you can do throughout the year. If someone makes noise, whether directly or through the media, about what will happen in the near future, watch.

The examples of projections by LPL Financial show how broadly this can apply. You can then narrow down on specific areas of investment, like commercial real estate. In general, pay more critical attention to those not just offering advice but directly selling financial products because their advice could be self-serving. Find what data is available, whether private or government, and see how accurately they looked into the future.