As the market volatility continues to rise, investors are reassessing their strategies to find stability in an unpredictable landscape. The CBOE Volatility Index (VIX) recently surged above 50, signaling increased investor uncertainty and expectations of ongoing turbulence in public markets. With concerns about inflation, tariffs, and geopolitical risks dominating the headlines, many investors are asking, “Where can I find stability?”

For some, the answer lies in necessity-based commercial real estate (CRE).

What is Necessity-Based CRE?

Necessity-based commercial real estate refers to retail properties anchored by essential service providers like grocery stores, pharmacies, banks, and urgent care clinics. These are the businesses that people rely on daily, regardless of the state of the economy.

These centers are often secured by long-term lease agreements, typically ranging from 5 to 15 years, with tenants that provide products and services that people consistently need. This kind of setup can offer a different risk profile than traditional public equities, which tend to be more volatile.

How Necessity-Based CRE Differs from Public Markets

While public markets can experience large fluctuations in a short amount of time, necessity-based CRE tends to offer more stability. This stability comes from several factors:

• Long-Term Lease Agreements: Typically ranging from 5 to 15 years.
• Rent Escalations: Often included in lease contracts to adjust for inflation.
• Tenant Obligations: Tenants are legally bound to pay rent regardless of market conditions.
• Prime Location: Properties are usually located in high-traffic areas, ensuring consistent footfall.
• Steady Demand: The services offered are essential, with demand remaining relatively constant.

Although necessity-based CRE is not risk-free, its structure offers a level of predictability that is often lacking in the public market.

Why Investors Are Turning to Necessity-Based CRE

1. Diversification

Necessity-based CRE tends to show a low correlation with the public markets, making it a valuable tool for diversification. This can help investors reduce exposure to the volatility of traditional equities and bonds, especially during uncertain times.

2. Income Potential

These properties are typically leased to tenants providing essential services, which can offer stable, predictable income. While returns can never be guaranteed, the long-term leases and tenant reliability make it easier to forecast potential revenue streams.

3. Stability in Demand

Products and services such as groceries, medications, and healthcare are needed regardless of economic cycles. While necessity-based CRE is not immune to market fluctuations, it often remains more stable than discretionary retail or more volatile investments.

Final Thoughts: A Shift in Strategy for 2025

The market volatility in 2025 has highlighted the need for investors to rethink their strategies. Not all assets react the same way to market swings, and necessity-based CRE offers a potential alternative. With long-term leases, a focus on tangible assets, and the steady demand for essential services, this type of real estate can provide stability in uncertain times.

For accredited investors looking to diversify their portfolios, now may be the perfect time to explore opportunities in necessity-based commercial real estate.