What Trends are Driving Profits for Commercial Real Estate Funds?
Earning healthy long-term returns and building wealth are the goals of every high net worth investor. Commercial real estate can help achieve both goals, since investors can derive significant benefits from real estate’s cash flow, price appreciation and tax advantages. But figuring out how to best invest in this asset class can be confusing given climbing property prices, rising interest rates and its many different offerings.
This brings the obvious to mind: Is it still a good time to buy?
Recent market fundamentals show that commercial real estate investing will remain lucrative in 2017. And National Real Estate Investor believes “high net worth investors plan to keep buying (commercial) real estate assets in 2017.” CBRE’s 2017 Americas Investor Intentions Survey substantiates this claim: 69 percent of its HNW respondents intend to increase purchasing activity in 2017.
But commercial real estate investing can be complicated and risky for several reasons.
Properties are expensive and mistakes can be costly. The bigger the property, the more resources are required for maintenance and repairs. A large single investment raises the stakes should anything go wrong, whether it’s unexpected repairs, low occupancy rates or meeting obscure legal requirements.
It’s also difficult for high net worth individuals to secure properties because they’re competing against institutional investors that have better and broader access to deals, financing and teams of people to help.
One way to lower costs and spread the risk is to invest in a private equity real estate fund that pools investor resources to buy and sell a group of properties, as noted in a recent piece on the Huffington Post. Funds minimize risk exposure through diversification of properties and geographic locations and take the hard work of property management off investors’ hands.
Private equity real estate funds can also offer investors access to better properties. For example, as seasoned real estate managers with three funds under our proverbial belt, we vet hundreds of possible commercial real estate deals each year before picking properties that we believe have the most potential. In 2016 the Origin team vetted over 1,000 properties to select seven.
We also have team members living in our target markets so that we can gauge property trends as they emerge. The most compelling trends we are seeing in the market right now are:
Resurgence of the Suburbs. CBRE Econometric Advisors projects continued rent growth for the North American suburban office market through 2018. Continued demand without much new supply will reward owners of efficient suburban buildings with high-quality amenities—especially since young workers are moving to the suburbs. According to the Lachman Associates consulting firm, only 13 percent of millennials live downtown, and only about a third identify as urban.
Loft Offices. Renovated brick and timber buildings with exposed ceilings are drawing rents comparable to office towers. The college-educated workforce wants to work in these unique buildings, and companies use them to attract and retain talent.
Micro Apartments. City rental units are dropping in size from 1,000 square feet to 400 square feet or less. This makes the best locations affordable for renters and doubles or triples the landlord’s number of units, potentially increasing properties’ profitability.
The “Death” of Big Box Stores. U.S. retailers including hhgregg, Macy’s, Sears/Kmart, JCPenney and Payless ShoeSource have closed or are scheduled to eliminate nearly 3,000 stores. Expect to see these buildings converted for medical, residential, office and even industrial uses.
While we expect these trends to continue, there is remarkable diversity in the U.S. commercial real estate market. Many sectors that offer “superior risk-adjusted returns and an opportunity to provide a superior level of management,” noted the Urban Land Institute in its 2017 Emerging Trends in Real Estate report.
With our boots on the ground and our expertise in asset management, we are able to continue finding properties that yield healthy returns and help investors build wealth.