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Markets in a Minute

Ranked: Real Estate Returns by Property Sector (2012-2021)

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This infographic is available as a poster.

Real Estate Return on Investment

This infographic is available as a poster.

Real Estate Return on Investment by Sector

For the ninth year in a row, Americans say real estate is the best long-term investment.

However, what might be less clear to the average investor are the different types of investments available within the real estate sector, and how they compare. Real estate return on investment within property sectors has historically been uneven, and 2021 was no exception. While residential property soared, office real estate has performed relatively poorly.

Are there any patterns in the top performers over time?

This Markets in a Minute from New York Life Investments ranks real estate return on investment by sector over the last decade.

Sector Returns Over Time

We used data from the National Association of Real Estate Investment Trusts to show real estate return on investment by year. A real estate investment trust is a company that owns, operates, or finances income-producing real estate.

Here’s how total returns stack up by property sector, sorted from highest to lowest return in 2021.

 2012201320142015201620172018201920202021
Self Storage19.9%9.5%31.4%40.7%-8.1%3.7%2.9%13.7%12.9%57.6%
Residential6.9%-5.4%40.0%17.1%4.5%6.6%3.1%30.9%-10.7%45.8%
Industrial31.3%7.4%21.0%2.6%30.7%20.6%-2.5%48.7%12.2%45.4%
Retail26.7%1.9%27.6%4.6%1.0%-4.8%-5.0%10.7%-25.2%41.9%
Diversified12.2%4.3%27.2%-0.5%10.3%-0.1%-12.5%24.1%-21.8%20.5%
Infrastructure29.9%4.8%20.2%3.7%10.0%35.4%7.0%42.0%7.3%18.6%
Timber37.1%7.9%8.6%-7.0%8.3%21.9%-32.0%42.0%10.3%16.4%
Mortgage19.9%-2.0%17.9%-8.9%22.9%19.8%-2.5%21.3%-18.8%14.7%
Office14.2%5.6%25.9%0.3%13.2%5.3%-14.5%31.4%-18.4%13.4%
Healthcare20.4%-7.1%33.3%-7.3%6.4%0.9%7.6%21.2%-9.9%7.7%
Lodging/Resorts12.5%27.2%32.5%-24.4%24.3%7.2%-12.8%15.7%-23.6%6.3%

Data for 2021 is as of November 30. Specialty and data center sectors are excluded as this data was only available from 2015 onwards.

Self Storage real estate was the best performing sector for the last two years, and also performed well during the 2015 market correction. It tends to perform well when people’s lives are disrupted, such as when they’re moving for a new job, schooling, or due to marriage or divorce. In the case of COVID-19, self storage got an extra boost from people wanting more space in their home amid remote work.

Timber and Industrial real estate have been in the top three performing sectors for at least half of the last decade. Industrial real estate, a category including properties that enable the production, storage, and distribution of goods, has seen increased demand due to the rise of e-commerce. One estimate says the U.S. could require an extra billion square feet of warehouse space by 2025.

On the other hand, the Lodging/Resort sector has frequently been one of the bottom performers. A form of discretionary spending, hotel stays may be one of the first expenses people cut when the economy is in a downturn. This weakness was compounded by lockdown restrictions during the COVID-19 pandemic.

What is a Good Return on Investment in Real Estate?

In light of the above data, investors may be wondering which sectors are “the best” to invest in.

The short answer: it depends. Here’s how real estate return on investment has varied within sectors, using the minimum, median, and maximum returns. We’ve sorted the data from the highest to lowest standard deviation, a measure of risk.

Real Estate Return on Investment

While Timber and Self Storage have delivered strong returns, they have also been relatively risky, with some of the widest variations in returns.

Industrials have seen the highest median return, and their risk is about middle of the pack. The second highest median return goes to the Mortgage sector, which earns income from the interest on mortgages and mortgage-backed securities. The mortgage sector has seen less risk than most other real estate categories, at least in the last decade.

For investors with a lower risk tolerance, Infrastructure may be a sector to consider. These properties had a positive return on investment for all of the last 10 years, and had the lowest risk of any property sector.

Patterns Within Real Estate Return on Investment

By looking at historical patterns, investors can consider how economic conditions may affect real estate return on investment.

Sectors associated with discretionary spending, such as Retail and Lodging, have tended to perform poorly during downturns. On the other hand, Self Storage and Residential properties have historically been more resilient during the 2015 selloff and the COVID-19 pandemic.

Future trends may also offer food for thought. For example, as the population ages and the government puts an increased focus on critical facilities, could the Healthcare and Infrastructure sectors be poised for growth?

Whichever sector(s) an investor focuses in on, real estate serves as an alternative investment that can help diversify any portfolio.

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Markets in a Minute

Identifying Trends With the Relative Strength Index

When is the S&P 500 Index considered overbought or oversold? The relative strength index may offer some answers to identifying market trends.

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Identifying Market Trends: The Relative Strength Index

What happens when the S&P 500 Index enters oversold territory? Does the market reverse, or continue on this trend?

A widely-used momentum indicator, the relative strength index (RSI) may offer some insight. The RSI is an indicator that may show when a stock or index is overbought or oversold during a specific period of time, indicating a potential buying opportunity.

This Markets in a Minute from New York Life Investments looks at the RSI of the S&P 500 Index over the last three decades to show how the market performed after different periods of overbought or oversold conditions

What is the Relative Strength Index?

The RSI measures the scale of price movements of a stock or index. In short, the RSI is used to calculate the average gains of a stock divided by the average losses over a certain time period. These are then tracked across a scale of 0 to 100. Broadly speaking, a stock is considered overbought if it reads 70 or above and it is considered oversold if it is 30 or below.

For example, when the S&P 500 Index has a RSI of 85, an investor may consider it overbought and sell their shares. Conversely, if the RSI hits 25, an investor may buy the S&P 500 thinking the market will bounce back.

The RSI is often used with other indicators to identify market trends.

The Relative Strength Index and S&P 500 Returns

Below, we show the 12-month returns of the S&P 500 Index after key ‘overbought’ or ‘oversold’ conditions in the market as indicated by the RSI:

DateRSIShiller PE Ratio*S&P 500 Index 12-Month Return
Jul 15 200220239.4%
Dec 4 200673274.5%
Oct 13 200815167.3%
Feb 7 201175231.9%
May 13 2013752316.1%
Jan 8 20188933-7.2%
Mar 16 2020222566.3%
May 3 202172370.0%

*Measured by the average inflation-adjusted earnings of the S&P over 10 years

As the above table shows, following each period of extremely oversold territory in the RSI, the S&P 500 Index had positive returns.

In fact, the S&P 500 Index had the strongest one-year returns following the COVID-19 crisis of March 2020, with over 66% 12-month returns. During the time of extreme fear, the RSI sank to deeply oversold territory before sharply rebounding.

Interestingly, following periods of extremely overbought conditions in the market there was a range of positive and negative performance. Most recently, before the peak of the last cycle in 2021, the S&P 500 Index spent roughly 9 months in ‘overbought’ territory before declining into 2022.

The Relative Strength Index in 2022

With the economy in uncertain territory, how does the RSI look today?

In early June, following a bleak consumer sentiment announcement, the RSI fell to 30, hovering on oversold territory. Since then, it has risen closer to 40 as consumer sentiment and perspectives on economic conditions have slightly improved.

However, whether or not the RSI will continue on this uptrend remains to be seen.

For the remainder of 2022, market sentiment, which may be shaped by the coming GDP and inflation figures, could push RSI into oversold territory once again. As a bright spot this may be good news—reinforcing a turning point in the market.

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Markets in a Minute

Visualized: How Bonds Help Reduce Bear Market Risk

How have bonds historically performed during a bear market? How have different stock and bond allocations performed?

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Bear Market Risk

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Visualized: How Bonds Help Reduce Bear Market Risk

Which tactics can investors use to reduce portfolio downside risk?

One time-tested method is allocating to bonds. Bonds have sheltered portfolio losses during bear markets thanks to the lower risk profile of bonds compared to stocks. Often, when stocks declined during market selloffs, safer assets like bonds tended to increase as the demand for stability grew.

This Markets in a Minute from New York Life Investments shows the performance of bonds and stocks during bear markets since World War II.

Bond Performance During Bear Markets

Bear markets are defined as a 20% or more decline in U.S. large cap stocks from peak to trough. Since World War II, bear markets have occurred less frequently than bull markets, with the U.S. stock market spending 29% in a bear market versus 71% in a bull market.

With this in mind, we show how a spectrum of portfolio asset allocations to stocks and bonds have performed over the last several bear markets.

  • Stocks: represented by U.S. large cap stocks
  • Bonds: represented by U.S. intermediate government bonds, which are issued with maturity dates between two and five years
Allocation (Stock / Bond)Average DrawdownAverage Time Until Recovery*
100% / 0%-34%3.3 years
90% / 10%-31%3.2 years
80% / 20%-28%2.9 years
70% / 30%-24%2.8 years
60% / 40%-20%2.5 years
50% / 50%-16%2.1 years
40% / 60%-11%1.2 years
30% / 70%-7%0.8 years
20% / 80%-4%0.8 years
10% / 90%-2%0.5 years
0% / 100%-1%0.2 years

*Length of time until new all-time high

For a 100% stock portfolio, the average drawdown was -34%, with 3.3 years until recovery—the time it took to reach a new all-time high.

Comparatively, a portfolio entirely made up of bonds fell -1% on average during bear markets with a recovery time of just a few months.

Balanced Portfolios in Bear Markets

Looking closer, we show how adding bonds to a portfolio has cushioned portfolio losses over the following market downturns, sometimes by as much as 20 percentage points.

Bear Market100% Stock Portfolio Max Drawdown60/40 Portfolio Max Drawdown
2020-20%-10%
2008-51%-30%
2001-45%-22%
1988-30%-17%
1973-43%-26%
1969-29%-18%
1962-22%-13%
1947-22%-13%

A balanced 60/40 portfolio had a 20% average drawdown, recovering in 2.5 years. During the 2020 COVID-19 crash, for instance, a 60/40 portfolio fell almost 10% and fully recovered in six months. By contrast, a 100% stock portfolio declined nearly 20%.

In all of the above historical downturns, investors with a diversified portfolio have been better positioned in a bear market.

Building Portfolio Strength

Bonds have historically seen less volatility than stocks during tougher financial conditions. Typically, riskier assets like stocks have been more prone to market fluctuations than bonds.

To prepare for a bear market, investors can structure a portfolio that aligns with their risk tolerance. Over the long run, the diversification benefits of bonds have been fundamental to protecting portfolios and lowering risk.

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