In this episode of the Financial Samurai podcast, I speak with Ben Miller, founder and CEO of Fundrise about his vision for commercial accommodation by 2025. Despite the high loan rates, he has a positive outlook and shares the main reasons why.
Listen to my interview with Ben by clicking the play button below or go to the episode on Apple or Spotify.
Reasons to Have Good Qualities in Commercial Residential Land in 2025
In my post, How Can I Invest $250,000 Todaytouch on why I believe commercial real estate offers a compelling investment opportunity in 2025. However, with mortgage rates stubborn to start the year, some skepticism has crept in.
Naturally, I was pleased to hear Ben’s optimistic view on the subject. Below is a summary of the four main reasons Ben is working in real estate in 2025, as discussed in the podcast.
You will notice some doubt in my voice as I challenge certain points in his arguments. Since there are no guarantees when investing in risky assets, it is always wise to disclose any potential blind spots.
1) Valuation Differences Between Stocks and Real Estate Very Wide
The S&P 500 trades at ~22x forward earnings, well above its historical average forward P/E of 17x. Historically, investing in stocks at such high prices has often led to a lack of profit.
Meanwhile, real estate prices have fallen more than 20% in the past two years, as stocks have risen more than 50%. This huge valuation gap seems unsustainable, especially if mortgage rates start to fall.
Below is a chart that caught my eye because it highlights how housing prices have fallen to levels similar to those seen during the global financial crisis. However, the economy and household balance sheets are very strong today. These cuts make me optimistic about commercial real estate, as prices have skyrocketed following the global financial crisis.
Back in 2010, I vividly remember wanting to start a fund to buy all the housing in Vallejo, a city 29 miles north of San Francisco that had declared itself dead. However, I didn’t have the money and the connections to make it happen. Today, I would rather invest in a real estate fund and gain exposure to real estate at huge discounts.
2) Functional Interactions Are Out of Alignment
Stocks and real estate have historically been highly correlated, as both reflect the broader economy. From 2012 to 2022, their performance went in parallel. A healthy economy benefits both asset classes.
However, starting in 2022, this correlation has decreased, creating an opportunity for those who believe in a reversal. In addition, in a potential recession, real estate may outperform stocks as investors shift to more stable assets.
3) Future Housing Supply
Higher interest rates through 2022 have slowed new construction significantly, even in builder-friendly cities like Austin and Houston. Costar says new housing starts in Houston are down 97%. This multi-year freeze on development sets the stage for a housing shortage.
Ben, whose company has a large portfolio of residential properties for sale, believes that the surplus from building until 2021 will be absorbed by the end of 2025, if not in the middle of 2025, sooner than many estimates. As a result, he expects rental and commercial real estate prices to start rising again in late 2025 and beyond. Their portfolio is seeing rental growth return.
In the interview, I also presented my argument that the return to office will strengthen real estate in big cities like NYC, San Francisco, Boston, Seattle, and LA, where building new development is very challenging. However, Ben remains skeptical, citing advances in technology as a counter factor.
4) Low Risk of Accelerating Inflation
There is widespread fear that a second term of Trump could bring more inflation. However, the economy in 2015, 2016, and 2017 was much stronger than today. However, despite strong growth and eventual tax cuts after Trump took office on January 20, 2017, inflation remained low until the pandemic.
Additionally, Trump has pledged to fight inflation during his campaign, suggesting he is unlikely to pursue policies that would exacerbate it.
Demographics also indicate long-term inflationary trends. As America’s birth rate declines, slower population growth is likely to exert downward pressure on inflation.
Investing in Commercial Properties for the Long Term
As a value investor, I always look for breaks in historical performance and valuation. Many personal finance enthusiasts may have this mindset, as we tend to be very frugal and cost-conscious.
In 2025, I would prefer to allocate more investment dollars to less valuable real estate than to expensive stocks. After the strong performance of the S&P 500 in 2023 and 2024, it is difficult to imagine the index again delivering the old returns in 2025.
So far, I have invested about $300,000 with Fundrisea trusted partner and long-time sponsor of Financial Samurai. With a minimum investment of just $10, dollar cost averaging in trading has never been easier.
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