Top Six Reasons Why Commercial Real Estate Is Attracting a Broader
Investor Audience to the Sector.
According to one of the largest commercial real estate firms in the world, U.S. commercial real estate sales topped $435 billion in 2015. The near-record volume of private and institutional capital flowing into the U.S. commercial and multifamily real estate market is a testament to the appeal of the asset class.
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.
Commercial real estate has a long history of being an attractive investment play during both up-and-down market cycles and represents an important role in an investor’s diversification strategy.
Real estate investments are often structured to deliver steady cash flow with dividends that are distributed to investors monthly, quarterly or annually. The two main options for investors are to make either an equity investment or a debt investment. 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 strive for — steady or rising cash flow over time.
Specific to equity investments, investors have the opportunity to boost their overall return by cashing in on property appreciation or a capital gain on an asset once it is sold. Property values certainly 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.
While realizing appreciation and capital gains is a definite incentive to real estate ownership, there also is depreciation on the other end of the spectrum. 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. In its most basic form, the physical improvements of a property may be depreciated over a 27.5-year period in an accounting method referred to as “straight line depreciation.” However, certain improvements (e.g., flooring) may be depreciated over a period as short as five years. 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. As the tax benefits of depreciation are dependent upon an individual’s or entity’s taxable income, investors are strongly encouraged to consult a tax advisor.
For assets that are mortgaged with a fully amortizing loan (in most cases over a 30-year period), the property’s revenues service an outstanding debt that reduces with each month’s payment. Think of it as a monthly savings program — the rents paid by a property’s tenants reduce the asset’s leverage, which in turn increases equity and thus investor returns at the point of exit (which at 75% leverage can amount to 25% of total returns) while also reducing risk. In a world of investment uncertainty, principal paydown infuses an element of month-over-month certainty of returns.
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.
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.