Top Eight Reasons Why Commercial Real Estate Is Attracting a Broader Investor Audience to the Sector.
U.S. commercial real estate sales topped $435 billion in 2015, according to one of the largest commercial real estate firms in the world. Commercial real estate has a long history of being an attractive investment during both up and down-market cycles and represents an important role in an investor’s diversification strategy.
Commercial real estate has a long history of being an attractive investment play during both up and down market cycles, and it represents an important role in an investor’s diversification strategy. Both domestic and international investors are looking to the U.S. as a safe haven to place capital as a strategy to both preserve their original investment and generate a positive return.
Stabilized and increasingly optimistic investor sentiment is expected to sustain current investment sale levels in 2017. Following three record years of single asset sales, increased portfolio and platform transactions will be a key factor for gains in 2017 and into 2018.
There are a number of current micro- and macro-level dynamics fueling that strong investor appetite for real estate. Chief among them are concerns about slowing growth in China and the negative impact that might have on the global economy. Direct real estate investment also offers a number of benefits (including, but not limited to) stability, portfolio diversity, cash flow and appreciation. Here’s an overview of the top reasons that commercial real estate is attracting a broader investor audience to the sector.
Institutional and private investors have been long-term investors in commercial real estate because of their long-term higher yields. Real estate returns are attractive compared to traditional alternative investments in stocks and bonds. The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index--which measures the performance of a large collection of commercial real estate properties—reported an annual return of 12.7% in 2015. Long term, the NCREIF Index has reported an average annual return of 8.8% over the past 15 years, which is 200 basis points above the average performance of the S&P 500 for the same timeframe.
Real estate investments typically deliver steady cash flow with income distributed to investors monthly, quarterly or annually. American Landmark Properties equity investments involve buying a passive, minority ownership stake in a hard asset, such as an office, industrial or multifamily building. High occupancies and rising rents generally deliver what most owners/investors seek—steady or rising cash flow over time.
This is the use of a small initial cash investment to gain a very high return in relation to one’s investment. Typically for investment properties, banks require an investment of 30 to 35 percent of the asset’s purchase price in cash as equity.
Real estate investments typically increase in value over the long term. This appreciation can be from increasing rents or from the market’s valuing the asset higher than it was in the past. Investors have the opportunity to boost their overall investment return by cashing in on property appreciation or a capital gain once the asset is sold. Property values rise and fall during market cycles, which makes timing the exit strategy a critical aspect of maximizing investor value. American Landmark Properties investment strategy is typically predicated on the prospect of stable cash flows, with a hold period of five to seven years or longer.
Depreciation is another benefit of real estate investing. Depreciation decreases the accounting value of the physical structure of a real estate asset, as most assets decline in value over time, but does not affect the market value of a property. Depreciation is utilized by real estate operators as a tax benefit tool, which allows an investor to utilize a passive “loss” from depreciating improvements to offset other passive income. The net result is a higher after-tax yield.
One of the great benefits of owning commercial investment real estate is the ability to finance a portion—typically a major portion—of the property through a loan. This allows investors to use the power of leverage to their advantage. If the property you invest in is financed, each monthly payment made will be split between principal paydown and interest. Using the revenue from the rental payments by the property’s tenants to pay down this loan in part also goes towards paying down the principal balance on your loan. More simply, your tenant’s rental payments are paying for you to add equity into your investment!
Another key advantage of real estate investing is that it is a good way to diversify portfolios that are backed by hard assets. Real estate is not the same as buying shares in a company that may be here today and gone tomorrow. Real estate is an asset class that investors can literally touch and feel. While some building occupants may come and go, and there may be ups and downs in building valuations over the course of its life, the property itself is not going to disappear.
Investors widely consider commercial real estate an asset class that can help offset the impact of inflation over the long term. In fact, that benefit is regularly cited as one of the advantages of adding real estate to a mixed-asset portfolio of investments. The ability to adjust rents over time is typically credited for real estate’s inflation-hedging benefits. Typically, robust economic growth should result in higher inflation, and therefore stronger rent growth.
There are many great reasons to invest in commercial real estate. Unfortunately, commercial real estate investment opportunities have historically been limited to minimum $250,000 investments, thereby putting the class out of reach to all but the most deep-pocketed investors.
However, legislation—including the 2012 JOBS Act—has recently helped launched a new class of online real estate marketplaces that is democratizing access to commercial real estate deal flow. Firms such as American Landmark Properties can now make direct commercial real estate investments easily accessible to accredited investors. The American Landmark Properties online investment platform gives investors transparent information on a variety of commercial real estate investment opportunities across the country, as well as providing tools to help investors track performance and manage their own growing real estate investment portfolios with real-time transparency.
American Landmark Properties offers institutional-quality commercial real estate investment opportunities and never charges fees for investors to join or invest. To register for a free account, please contact us today.