Commercial Real Estate vs. the Stock Market: Where Should You Invest?

By Nick Lucas | Partner, Broker

A client recently asked me a question that investors have debated for decades: If the stock market has historically delivered strong returns, why invest in commercial real estate? The answer isn’t that one asset class is better than the other, it’s that commercial real estate offers distinct advantages—including inflation protection, tax benefits, and greater control—that can make it a valuable part of a diversified portfolio

He appreciated my insight and nudge to diversify his portfolio, but had a few questions for me:

• • • • Why would I move money out of the stock market?
      • Are the returns in CRE really as good or better?
      • If I do diversify, how much should I invest in real estate vs. stocks?

These simple questions have been debated in economic circles for decades, and both asset classes have created tremendous wealth for investors. But, how do you know what’s best for you?

FINDING THE RIGHT BALANCE

Financial advisors generally recommend that high-net-worth investors diversify their portfolios with ~25% to 40% invested in real estate and the remaining ~60% to 75% allocated to stocks, bonds, and cash.

But there’s no universal formula: Warren Buffett famously recommends most investors keep 90% of their portfolio in a low-cost S&P 500 index fund and 10% in short-term government securities. Other well-known investors hold their wealth in real estate supplemented by Treasury Bills for liquidity. T-bills are backed by the full faith and credit of the U.S. government, are exempt from state and local income taxes, and provide investors with a relatively safe place to park capital while waiting for acquisition opportunities. Currently treasuries are yielding around 3.6%-3.8% and investors typically purchase T-bills with 3-month, 6-month, and 1 year maturity times.

For some, avoiding the stock market comes down to risk tolerance. Stocks can experience significant price swings driven by external factors like economic news, geopolitical events, or investor sentiment. And though CRE is certainly not risk-free, investments aren’t usually exposed to the same day-to-day risks that cause the stock market’s volatility.

Real estate investors also tend to appreciate the direct influence they have over their properties. They select tenants, negotiate lease terms, make improvements, control expenses, and manage operations—meaning you have an impact on your investment outcomes instead of the external forces that can impact the stock market.

COMPARING HISTORICAL RETURNS

The reality is that both stocks and CRE have historically generated strong long-term returns. Since its inception in 1957, the S&P 500 has delivered average 10% annual returns, with returns closer to 11.5% over the past 40 years. CRE has also performed well, producing average long-term returns generally ranging between 9.5% and 10%, and sometimes up to 11–12% on moderately risky deals.

With historical returns being relatively comparable, why choose CRE? The answer comes down to two major advantages: inflation protection and tax benefits.

INFLATION PROTECTION

Since Covid-19, inflation has become one of the most pressing economic issues, and the oil crisis and Iran conflict have caused it to spike to 3.8% (Bureau of Labor Statistics Consumer Price Index, May 2026)—its highest level in years and a far cry from the Fed’s target of 2%.

Goods and services are still getting more expensive, which leads investors to find ways to preserve and grow their purchasing power. Historically, CRE has been one of the most effective long-term hedges against inflation because:

• • • CRE historically outpaces inflation during long-term holding periods
    • Property values and rental rates tend to rise over time alongside inflation
    • Most commercial leases include annual rent increases, helping landlords maintain income growth
    • Investors who secure fixed-rate financing effectively lock in their borrowing costs while rents and property values increase
    • Multifamily and self-storage properties often have shorter lease terms, allowing owners to adjust rents more frequently in response to market conditions
    • Triple-net (NNN) leases pass most operating expenses to tenants, helping landlords offset increases in taxes, insurance, and maintenance costs

One of the most powerful aspects of real estate investing is leverage. When inflation rises, investors continue repaying fixed-rate debt with future dollars that may be worth less than when the loan originated, while the underlying asset and rental income may continue appreciating.

TAX ADVANTAGES

CRE also offers the following tax benefits that stock market investments aren’t able to leverage.

1031 Exchanges

1031 Exchanges allow investors to defer capital gains taxes by reinvesting proceeds from the sale of one investment property into another qualifying property of equal or greater value.

Mortgage Interest Deductions

Interest paid on CRE loans is generally tax deductible, reducing taxable income and improving after-tax returns.

Operating Expense Deductions

Many ownership expenses—including property management fees, maintenance costs, repairs, and professional services—may be tax deductible.

Depreciation

One of real estate’s most valuable tax benefits is depreciation. Commercial buildings can generally be depreciated over 39 years, allowing owners to deduct a portion of the property’s value annually, even when the asset’s market value is appreciating.

For example, a commercial building with a depreciable basis of approximately $1 million could generate roughly $25,000 in annual depreciation deductions.

Cost Segregation Studies

Many investors also leverage cost segregation studies to accelerate depreciation deductions. These studies identify building components that qualify for shorter depreciation schedules and potentially create significant near-term tax savings.

Step-Up in Basis

For long-term estate planning, real estate can offer another advantage. When the owner dies, heirs may receive a “step-up” tax basis to the property’s current market value, potentially reducing future capital gains taxes if the property is sold.

ONE FINAL NOTE

The real question isn’t whether stocks or commercial real estate are better. It’s whether your portfolio is benefiting from the strengths of both. For many investors, commercial real estate isn’t a replacement for the stock market—it’s a complement that can provide cash flow, tax efficiency, inflation protection, and diversification over the long term.

For investors considering their first acquisition, it’s a smart idea to build a relationship with an experienced CRE broker. A knowledgeable broker can uncover opportunities that may never reach the public market and help evaluate critical factors like your financing scenarios, lease structures, market rental rates, capitalization rates, tenant quality, and long-term investment performance.

Ultimately, the best investment strategy is the one that aligns with your financial goals, risk tolerance, and long-term vision. For many investors, that strategy includes both CRE and the stock market, not one or the other.