Investing has always involved taking calculated risks; it offers the potential for substantial returns but comes with the risk of losing it all. Throughout history, investing has been a popular way to build generational wealth. However, during recessions, market volatility, and economic uncertainty, many investors seek safer investment options. This phenomenon is known as the Flight to Quality. This article explores this trend and its impact on the investment landscape.
Flight to Quality
Flight to Quality refers to the herd-like mentality where investors collectively move their assets from riskier investments to safer ones, usually prompted by a volatile market and economic uncertainty.
In today’s investment landscape, Viking Capital has observed this trend in multifamily real estate investments as well. The prevailing investor sentiment is to invest in Class-A assets, typically in core-plus or core properties.
Investor Survey Bolsters Flight to Quality Preference
The 2024 U.S. Investors Intentions Survey, conducted by CBRE, states that 90% of multifamily investors prefer Class A properties, while nearly half favor value-add Class B/C assets. It’s evident that Class A properties are currently the top choice for investor capital deployment in 2024.
On the other hand, there is a minority of investors still willing to operate with a higher risk, higher reward mindset. This means that opportunistic investments, which have the potential for extremely favorable upside, are much less likely to be funded due to the level of risk involved.
Strategic Investment through Flight to Quality
Investors generally agree that diversifying investment portfolios is crucial to creating a safety net. Our economy is rife with uncertainty, from political agendas influenced by the upcoming elections to a high interest rate environment with no sign of relief in sight.
Investors who feel bullish about the commercial real estate market may choose to invest in opportunistic properties with higher upside potential and more risk. Investors who strategically invest in a downturn at the bottom of the market are less fearful of loss, as they expect a much higher return once the economy rebounds in a few years.
“Goldilocks” Investment
The ideal real estate investment during uncertain times involves a core-plus asset with a slight value-add component. This type of investment offers the benefit of being risk-averse while still providing the potential for higher returns through property improvements that naturally increase monthly net operating income (NOI) and overall asset appreciation.
Viking is actively evaluating numerous deals each month to find the right opportunities for our investors, recognizing the demand for this type of asset.
Key Takeaways
The uncertain economy has led to reduced confidence in popular investments. In 2024, the current economic situation has raised several concerns for investors. Some have experienced fluctuations in their investment portfolios, while others have been able to take advantage of distressed assets. This uncertainty has prompted many investors to seek a safe haven for their investments. As a result, every asset class is adapting to meet the needs and preferences of investors as the economy recovers from the downturn.
