With talk in the news of a recession, today’s investors may be starting to reexamine their investment strategies. An inverted yield curve, volatile stock market fluctuations, and current trade wars may be causing some investors to take a healthy pause in order to reevaluate where and how they are investing.
Many of these investors might be thinking that now may be the time to diversify into other investments, such as commercial real estate.
Commercial real estate has historically been a powerful and relatively stable investment vehicle for those seeking to preserve their wealth and grow their portfolios. Typically, institutional investors invested in commercial real estate. However, that has changed with the introduction of alternative investment vehicles that have allowed the average investor to participate in real estate at many levels.
Here are the reasons one may consider investing in real estate:
The Increase In Demand For Office Space
Today’s corporate giants are growing larger.
Investors need look no further than the current Fortune 500 list to discover that America’s 500 largest corporations garnered a record $13.7 trillion in revenues—equating to more than two-thirds of the entire US economy.
As of mid-year 2019, Amazon’s revenue rose 20% year-over-year, while major players such as Google and Apple have hit tremendous revenue milestones and announced major plans for office expansions.
As these powerhouse companies continue to expand, their demand for commercial real estate to house their growing teams of talent will grow. These companies are seeking walkable office locations surrounded by a wide variety of retail, entertainment and transportation options. They are looking for space that incorporates top amenities demanded by today’s workforce such as indoor/outdoor community space, fitness and wellness centers equipped with on-site fitness classes and conserige services, among many other features.
Investors seeking to invest in real estate securities should evaluate the property owners with whom they choose to invest to ensure that the assets under ownership are well-positioned to leverage America’s corporate growth.
Cash Flow
One of the most important investment benefits of commercial real estate is cash flow from rents.
Secured by leases, commercial real estate investments can deliver regular passive income.
This is important because investing in commercial real estate assets with great cash flow can provide investors with a stream of income and yields that can be higher than typical stock dividend yields.
Investors looking to invest in real estate assets should look for those where risk is mitigated and shared across multiple tenants. For instance, if a company invests only in properties that are leased to single tenants, a vacancy from that single tenant could disrupt cash flow.
Hedging Against Inflation
The U.S. Labor Department recently revealed that the core consumer price index is up 2.4% from a year ago.
During times of rising inflation, institutional investors may seek a hedge against rising inflation by investing in commercial real estate.
Commercial property values are typically based on net income and market capitalization rates. In general, when inflation occurs, rents and expenses rise. This can lead to an increase in net income, particularly in multi-tenant properties, which can result in a subsequent rise in property values.
While inflation is a national economic indicator, for those investing in real estate, it is important to consider property owners or investment firms that look at data locally, not nationally. Commercial properties typically perform based on local and regional market dynamics, including job growth, transportation and infrastructure investments, talent pools, etc. Investors may find more success hedging inflation by investing with owners who acquire and operate assets in high-growth local markets.
Intrinsic Value
Many investors may choose commercial real estate investments because they are tangible assets with inherent value.
Unlike stocks, real estate investments are assets with intrinsic value in the land and the building(s).
Economist William D. Larson approximated the total value of America’s land in the contiguous 48 states at nearly $23 trillion, with those values varying widely among states. Investing in a portion of that land may deliver an immediate upside, even before commercial property owners implement value-creation strategies.
Recognizing the wide variance in values from market-to-market, investors seeking stability may benefit from an investment firm or property owner that invests in the epicenter of growth markets in order to maximize both intrinsic and created value.
Appreciation
Beyond their physical value, commercial assets can appreciate, especially under the right ownership.
This means there is an opportunity to garner higher returns when an asset is sold.
Properties will likely appreciate based on market factors such as supply and demand. Further, proactive management can accelerate property appreciation. Property owners that can implement property-level improvements to leverage current demand and maintain high occupancy may be in a better position to deliver strong, steady returns.
Investors interested in real estate securities should seek out a property owner with a strong track record of asset appreciation. Investors should look both at acquisition and disposition pricing and at net income throughout ownership to ensure their investment partner is striving to increase property value strategically and organically.
Marc DeLuca is regional president, eastern region at KBS.