Why It Is Important to Invest in Commercial Real Estate
Companies come and go, and markets waver. But real estate outlasts business decisions or industry fluctuations. Land is one of the most valuable resources we have at our disposal. It can transition when a company changes hands, be developed when a business expands, or be repurposed for new uses as needed. The flexibility of real estate is just one example of why commercial real estate is such an important investment to add to any portfolio.
The option to invest in commercial real estate is no longer limited to those with large investment portfolios. Crowdfunding has made it possible for even the newest prospective real estate investor to chip in his or her resources—as little as $5,000. Commercial real estate is the investment opportunity that best fits the long-term investor. It’s an important investment for serious investors, who want to see a substantial return for their money.
Commercial Real Estate Is a Hard Asset
Commercial real estate is a hard asset, which means it is usually a long-term asset. A company will typically use their hard assets for more than one year. This is good news for investors, because they have the potential of making money for a longer time frame. As long as the property has a tenant, regular income flows back to the investor.
As a hard asset, real estate is calculated into the value of a company who owns their own property. Because it is used to create goods or services, it is an extremely valuable part of the company. So in the case of a company going bankrupt and selling their facility, their investors can still earn a portion from that sale. In this way, CRE is a benefit to real estate investors and even a side benefit to shareholders who have invested in a company directly.
Additionally, hard assets, like real estate, are not heavily impacted by inflation. CRE is an illiquid asset, and also appreciates over time. This makes the investment less of a risk to the investor.
Lower Volatility
Real estate investing offers lower volatility than other kinds of investments. Because of the length of time that a business occupies CRE, there are fewer transactions. Unlike residential real estate, which can see significant tenant turnover in a short amount of time, CRE occupancy is more predictable and stable. As of 2018, private market CRE had reportedly averaged a 9.85% return over the last five years. This is evidence that CRE is a more dependable investment opportunity.
Risk vs. Return Investment Strategies
CRE investors can also have decision-making power over which type of asset class they would like to invest in. This allows them to control their investment based on how comfortable they are with risk.
These are brief descriptions of the four main asset classes:
- Core investments include properties with dependable tenants and a lower possibility of vacancy. Investors who choose this option appreciate a safer investment opportunity and moderate return.
- Core-plus investors seek properties that can yield a slightly higher return than the core asset class. These investors are comfortable with investing in properties with vacancies or those in need of upgrades. They welcome the chance to earn additional income with impending possibilities.
- Value-add properties are primarily those in need of renovations. Investors can obtain these properties at a lower cost, make necessary changes, and then fill the vacancies. These properties are typically then sold within the core asset class.
- The opportunistic asset class includes some of the riskiest properties. New markets, foreclosed properties, or new developments all fit in this category. The investors that choose this asset class have a big-picture view of the future of the property. While they will need to front a substantial amount of money, they can yield an impressive return in the long run. These asset class options give CRE investors a lot of control over their investment. They can manage the risk and the return in ways that other forms of investments don’t offer.
Investment opportunities come in many forms, and commercial real estate is easily one of the most important to consider. The inclusion of CRE in an investment portfolio provides healthy diversification which can lead to more substantial returns. An investor who is seeking to consistently increase his or her earnings should consider investing in commercial real estate.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
