Commercial real estate includes office buildings, apartments, shopping centers, hotels, and multifamily with more than four units. Investing in commercial real estate can generate current income, total returns, and diversification. Although this asset class may be affected by a financial crisis and limited supply of commercial mortgage debt. VasTree Commercial associates have put together this article to help you analyze if this is the best investment vehicle for your financial plan.
This asset class has the potential to provide investors with attractive returns, cashflow, diversification, and an effective hedge against inflation. The NAREIT Equity Index (“NAREIT”), an index of publicly traded equity REITs, has generated a 10-year return of 10.20%. This shows that commercial real estate has historically generated favorable returns.
Commercial leases are executed on a longer-term, varying from 3 to 30 years lease term. Its common that contractual leases include periodic Consumer Price Index (CPI) or fixed upward lease adjustments. Properties with long-term leases possess greater value in the real estate market. Commercial properties have the potential to bring capital appreciation and increased current income based on consumer market and the economy. These economy-sensitive industries include hotel, hospitality, time-share, vacation rentals, and storage.
Investment returns differs greatly between prime markets and secondary markets. Prime markets refer to stabilized locations with higher demand, population, and are usually more favorable for investors. Secondary markets may have lower demand, lower desirability by investors, or may be in a newer incorporated location.
With all the benefits that generates from investing in commercial real estate, there are certain amount of risks involved. Commercial properties are taxed differently. It may not have a high degree of liquidity due to its lower demand compared to residential properties. Turn-over on vacancy for an office building may be a lot longer than a residential condominium due to consumer demand and market supply. There are higher operating expenses associated with commercial properties such as transient occupancy tax, business licenses, occupancy license, fire alarms, maintenance, etc. Most commercial properties require professional property management to ensure occupancy stability, lease negotiation, daily operation, and on-going maintenance. Commercial real estate market is heavily influenced by market supply, demand, economy, and supply of debt financing. Debt financing is essential for healthy transaction activity and new developments. Commercial real estate may bring attractive long-term returns but it is not immune from the impact of economic cycles.
The current real estate market offers investors attractive opportunities. Its important to conduct due diligence by hiring a professional to validate leases, financials, and valuation. We believe that by selecting an experienced commercial real estate agent will put our investors in the best position to take advantage of the opportunities offered in the commercial real estate market. Contact one of our VasTree Commercial associates today.