Investing in commercial real estate may result in a steady stream of solid long-term profits. However, given that real estate values are near post-recession highs, investors frequently ask us if it is still the right idea to invest in commercial real estate.
Yes, there is still time.
Commercial real estate is cheap in Atlanta, Jacksonville, Ohio, and Chicago, according to market analyst RCA, while it is overpriced in New York, Boston, Oakland, and San Francisco, according to Real Capital Analytics. This is consistent with the Urban Land Institute’s earlier this year estimate that midsize areas with a lower cost of doing business are wise investments for real estate investors.
We’re still discovering sensible commercial real estate investments as methodical private equity investors. Due to certain market factors, we anticipate that investment in commercial real estate will be profitable for a considerable period.
These five elements describe why we anticipate that the value of the commercial real estate will keep increasing:
1. The economy is growing steadily. Although it is growing, the American economy is not yet at an overheated level. The government’s official estimate of the gross domestic product for the first quarter of this year showed a 1.1% increase. This figure conceals a slowdown in nonresidential fixed investments, which includes office assets. However, it also contains valuable impacts from residential fixed investments, which include multifamily properties and residential real estate projects.
2. Increased growth is facilitated through hiring. The newest data from the Labor Department highlights significant hiring in the construction sector, which is up 3.4% from a year ago. Over 2.3 million net new jobs have been created in the private sector overall in the past year. The industries that are employed will determine where and what kind of real estate will be in demand since these individuals will need locations to work.
In addition, the Millennial generation’s ascent and the variety of lifestyles they choose are fueling metropolitan regions’ demand for office and apartment space.
Education and health-care jobs have increased by 2.8 percent, second by entertainment and tourism (2.7 percent), professional services (2.5 percent), and retail and financial industries (2.5 percent) (both 2.0 percent). The need for additional offices, shops, and flats in the private sector will be met by developers.
3. Office rent is continuing to rise. According to Jones Lang LaSalle’s 2016 Q2 U.S. Office Outlook, new residential leases in brisk secondary markets are commanding a premium of 34%.
4. It pays to take a chance. Other asset classes also have prices that are record highs besides real estate. The improved economy has contributed to the Dow and S&P 500 setting new highs. Investors continue to participate in the stock market despite high pricing. The cost is acceptable given corporate profits.
The capitalization rate, which is calculated as the net operating income divided by the asset value of the property, is around 350–400 basis points greater than the yield on 10-year Treasury notes. The excess return needed by investors over the risk-free rate is known as the “risk premium” and meant by that term.
Although traditionally the margin has been between 250 and 300 basis points, it was just 100 basis points in 2007. In the current market, investors are still compensated for taking a risk.
5. Excellent offers are still available. Modern commercial real estate is more difficult to find at a good price. However, high-quality assets are out there, especially for businesses like ours that take a systematic approach to screening possible acquisitions. Additionally, we have developed connections in the private equity real estate sector and can buy institutional-grade assets off the open market (and avoid bidding wars). To fully realize the value of such assets, we then put knowledgeable managers in place.
Therefore, investing in commercial real estate is still a viable option. Private real estate investors may achieve great profits in developing and mature markets by adopting a methodical, long-term strategy.
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Come join us! Email me at mark@dolphinpi.us to find out more about our next real estate investment.