Investing in commercial real estate — office and retail space, restaurants, warehouses, gas stations, and the like — can be lucrative and, due to its income component and less pronounced business cycles, serves as a good hedge against the volatility of the stock market, where price movements equate to a bigger portion of return rates. Over time, if managed correctly, commercial real estate assets tend to offer stability. (For more, see: Commercial Real Estate 101 and How to Make Money In Real Estate.)
Investors in commercial real estate can make money via appreciation when they sell, but most returns are generated through rents collected from tenants. Long lease terms can help mitigate economic fluctuations and their impact on income. (For more, read: Real Estate and Mortgages Tutorials.)
COMMERCIAL HOT SPOTS
A study by PwC and the Urban Land Institute predicts strong growth in the commercial real estate market over the next couple of years. Some of the industry's most promising cities according to the survey include Houston, where the energy industry is expected to drive growth; Austin, which has a strong industrial base, low business costs and an influx of millennials seeking housing; San Francisco, the top choice for hotel investments in 2015 due to its robust economy and increasing draw for travelers; Denver, with a solid industrial base in technology and energy; and Dallas/Fort Worth with its low cost-of-living, job growth and diverse economy. (For related reading, see: Money Habits of the Millennials.)
Finding direct investments is straightforward: Commercial real estate firms like CBRE Group Inc. (CBG), Newmark Grubb Knight Frank, Jones Lang Lasalle Inc. (JLL), Cushman & Wakefield, and DTZ all have a range of listings nationwide. Prominent websites for residential property, such as Trulia and Realtor.com, also include searchable databases of commercial listings. Another site, LoopNet, specializes in commercial property. (For more, see: Will Higher Interest Rates Crush Real Estate?)
An investor can purchase a small retail space or storage center directly or through a private partnership, but the down payment requirements tend to be much higher than for residential properties. Think 30% down vs. 3% for a home.
Investing in real estate investment trusts (REITs) might be an easier option. Essentially a company that owns and operates income-producing properties, REITs are securities that sell like stocks on the major exchanges and invest in real estate directly. REITs are a highly liquid way of investing; they receive special tax considerations and typically offer investors high yields. (For more, read: Key Tips for Investing in REITs and Top 10 REITs for 2015.)
“The most convenient way for most individual investors to tap the commercial real estate marketplace is through REITs,” said Christian Thomas, an investment consultant with Glastonbury, Conn.-based USI Advisors. “REITs were established by congress just for that purpose, and most have daily pricing and daily liquidity.” (For more, see: What Are the Risks of REITs?)
INDIRECT OWNERSHIP
Another way to tap into the commercial realm is via commercial mortgage-backed securities, (CMBS), interest-paying bonds that hold bundles of commercial mortgages. Issuance of CMBS is expected to rise to $150 billion in 2017 from an anticipated $115 billion in 2015, according to the Urban Land Institute's Real Estate Consensus Forecast, published earlier this year. (For more, see: Top Mortgage-Backed Securities ETFs.)
“It really comes down to personal preference,” said Brian McAuliffe, an executive managing director in the capital markets division of CBRE. “REITs, commercial mortgage-backed securities, and limited partnerships are passive, while direct investment in commercial real estate — say from a high net worth individual, or a small-business owner — is much more active.”
Michael Orzano, director of global equity indices at S&P Dow Jones Indices — it puts out the S&P/Case-Shiller Home Price Indices, a leading measure of home prices in the U.S. — cautions against buying property outright, given the many headaches that plague management companies and/or landlords. “Direct investment in commercial real estate is not practical for most investors given the large investment required to purchase a single property and the oversight required to manage the building or buildings,” he said. “Direct investments are also highly illiquid and typically may lack diversification since the investment is concentrated in one or few properties.”
Orzano continued: “REITs provide access to an illiquid asset class — real estate — without sacrificing the benefits of listed equities. A single REIT will also typically own a portfolio of properties, which improves diversification. Index-based products, such as ETFs that track property and REIT benchmarks, provide a cost-effective means of accessing a diversified portfolio of REITs.” (For more, read: Impact of Interest Rates on REITs.)
THE BOTTOM LINE
With the industry expected to appreciate over the next couple of years, investing in commercial real estate could be a good way to balance your portfolio if you also hold stocks, which fluctuate with the volatility of the markets. While owning property outright lends itself to a steady income of rent, it can also be time consuming and risky dealing with tenants. Investing in assets like REITs or commercial mortgage-backed securities offers exposure to real estate's growth without having to deal with the myriad of issues property owners face. (For more, see: How to Finance Foreign Real Estate.)
Take the Futures Challenge!
The Futures Institute is an innovative new online platform for futures market education, trading simulation and market research. Engage in a one week program that combines live instruction, simulated trading and interactive training modules all while competing against your peers! Sign up for free today and learn by trading.
Blogger Comment
Facebook Comment