Is It A Good Time To Buy Commercial Real Estate

IS IT A GOOD TIME TO BUY A BUILDING?

Invest in CRE

As we’ve previously discussed, there are many benefits to investing in commercial real estate. But after over a year of chaos amid a global pandemic, you might find yourself asking, is it a good time to buy a building? Let’s discuss elements you should consider before investing in commercial real estate.

THE BENEFITS OF INVESTING IN CRE

“The wise young man or wage earner of today invests his money in real estate.” —Andrew Carnegie

First, there are three benefits in particular that we are going to cover today—some might refer to it as the CRE trifecta!

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TAX BREAKS

One huge benefit of investing in commercial real estate is tax breaks. When you own property, (or for the sake of this article, a building), you can deduct mortgage interest, depreciation, and operating expenses as a tax write-off. For those who are strategic, capital outlays, such as new parking lots or roofs, can be expensed as well.

APPRECIATION

We know that real estate value increases over time. Given this, another benefit of buying a building is capital appreciation. Appreciation will vary based on local supply and demand, interest rates, inflation rates, and additional factors.

It’s important, however, to consider the ages of the investors. Appreciation can take many years, so for those who are older, they may end up passing down properties to heirs who will be the ones to see the increased value.

COST STABILIZATION

Rental rates will increase over time, by a fixed amount or as a result of changes in the Consumer Price Index (CPI), for those who take on a series of short-term leases (typically three to five years).

On the other hand, when you purchase a property, you can achieve stable costs by using a fixed-rate debt that can fully amortize over 20 to 30 years.

So, with all of these benefits, why does anyone lease or rent a commercial property? Why not buy? What needs to be considered prior to investing in commercial real estate? Let’s dive in.

For additional details on the pros and cons of leasing and/or owning commercial real estate, check out this article.

ELEMENTS TO CONSIDER BEFORE INVESTING IN COMMERCIAL REAL ESTATE

1. ECONOMIC RECOVERY

To most everyone’s delight, after over a year of chaos due to the COVID-19 global pandemic, the economy seems to be improving. Things, however, are not completely “back to normal,” as some might say.

Over the past months, the Southern California commercial real estate market has begun to again gather steam, as put by CoStar. For more on commercial real estate sales post-pandemic, visit this article.

2. SPACE NEEDS

Is your company growing rapidly? If so, purchasing property may not be your best bet. By leasing a commercial property instead, you gain the flexibility to accommodate your growing business in the future.

In fact, research shows that if your business plans “to stay in a single location for less than 7 years, then leasing might be a better option.” This research takes into consideration monthly recurring costs, tax savings, asset price appreciation, increased business equity, up-front costs, opportunity costs, and money earned in the sale of the property.

3. DOWN PAYMENTS

While purchasing property is a great long-term investment, it requires a great upfront cost to do so. (Traditional loans typically require between 10-25% of the commercial property’s total value as a down payment). And in some cases, this cost might include not only the down payment but also improvement costs, appraisal fees, loan fees, and more.

4. FINANCEABILITY

The process of qualifying for necessary loans or financing can prove to be a big hurdle when buying commercial real estate. While not currently an issue, high interest rates can make leasing a more cost-effective and attractive option, especially if interest rates get upwards of 10%.

But what about those who are waiting for a ‘deal’? To this, Jammie Jelks of Legacy Home Loans says, “the best time to buy a property is when you can afford to. There’s no need to wait for a down market where you try and get a ‘steal.’

“If you can afford to buy, then buy. If you cannot afford to buy, then don’t. A down market for one is not a down market for others.”

5. COMPANY STRUCTURE: PUBLICLY TRADED?

Generally, publicly traded companies—for example, Apple, Microsoft, JPMorgan Chase, and so on—tend to steer away from building ownership. This way, depreciation won’t impact revenue.

6. PARTNERING WITH A COMMERCIAL REAL ESTATE PROFESSIONAL

Given the events that have transpired in the past year and a half, it is even more important to consider partnering with a CRE professional when it comes to purchasing commercial property. A top-notch broker has access to timely, accurate market data and is an expert in their local industry.

CRE PROPERTIES THRIVING TODAY

The commercial real estate sales landscape, of course, looks different than it did prior to the COVID-19 pandemic.

Prior to the pandemic, commercial property performed successfully, including:

  • Convention hotels
  • Office buildings in downtown spaces
  • Tenants in mall sectors

These property types, however, did not thrive during the year 2020 and the first half of 2021, according to Real Capital Analytics, as a result of stay-at-home orders and for many businesses, closed doors, reduced capacity, or other limitations.

On the other hand, there were a handful of commercial properties that not only stayed above water but actually performed well throughout the pandemic. Today, investors are continuing to flock to:

  • Warehouses
  • Apartment buildings with desirable amenities (although rent declined at the start of the pandemic, it has been on a solid upward tick ever since,  according to CoStar)
  • Life science spaces
  • Hospitality (on its way to recovery)
  • Industrial properties
  • Storage Spaces

In fact, “industrial demand has outperformed as e-commerce and medical device firms expand,” according to CoStar.

A FINAL WORD

At the end of the day, the decision to invest in commercial real estate comes down to your unique business and its needs. It is helpful, however, to look at the current economic environment, trends, and your specific business when making a decision.

Regardless of your choice, you’re not alone in this process. At Voit Real Estate Services, our brokers have the experience to negotiate the best deals with your best interest at the core of everything we do.

Ready to make the big move? Read our blog for tips on how to secure quality commercial office space.

When is the Right Time to Invest in Commercial Real Estate?

Commercial Real Estate has historically been a powerful and relatively stable investment vehicle for those seeking to preserve their wealth while growing their portfolios. As the number of investors seeking direct co-investment into real estate continues to rise, so does the opportunity to allocate capital on a deal-by-deal basis. Add this to a steadily growing economy, interest rates remaining at historical lows, and commercial lenders willing to do whatever it takes to win borrowers’ business – there is no better time than NOW to invest in Commercial Real Estate.

However, we’d be remiss if we didn’t acknowledge that we are in the tenth year of the longest economic expansion in US history with a recession feeling imminent. The bottom has to fall out at some point, right? Some industry insiders go so far as to say if you haven’t already invested in commercial real estate, you’ve missed the boat, while others believe there are “recession resistant” investments still available. In our opinion, it’s just a matter of being smart about the investments you consider.

When “those in the know” are taking such diametrically opposed positions on the state of the commercial real estate market, it leaves investors with a question of what to do. Here’s the good news – whether you’re bearish and think we’re heading for a pullback, or a bull and believe this economy will continue to have legs, NOW is a great time to invest in commercial real estate.

Here are five reasons why:

 

1) Increased Demand for Office Space

With unemployment at 3.6% (the lowest it’s been since 1969), a maturing millennial generation entering its prime earning years, and corporate giants growing larger, the demand for more square footage is apparent. Look no further than the current Fortune 500 list. Last year, America’s 500 largest companies pulled in $13.7 trillion in revenues – more than two-thirds of the entire US economy. As companies continue to expand, their demand for commercial real estate to house their businesses will also grow.

2) Ongoing Cash Flow

One of the most important benefits of commercial real estate is the cash flow generated from rents. Secured by leases, commercial real estate investments can deliver consistent, passive income; income that comes in regardless of market cycle. We mentioned above about being smart with your investments, and at Excelsior Capital, we further mitigate cash flow risk and increase ROI by investing in office buildings with multiple tenants. This dynamic prevents any one tenant from dictating all of our cash flow if, for example, that tenant were to leave the building at the end of their lease.

3) Hedging Against Inflation

During times of rising inflation, savvy investors may seek to hedge against it by investing in commercial real estate. Commercial property values are typically based on operating income and market capitalization rates. In general, when inflation occurs, rents rise. This rise leads to an increase in operating income, which subsequently results in an increase in property values. As you can see, this relationship allows commercial real estate to serve as a strong hedge against inflation.

4) Low Volatility

Simply put, many investors may choose commercial real estate investments because they are tangible assets with inherent value. What’s more, the low volatility of direct investments in commercial real estate can serve to counteract other, highly volatile assets in your portfolio. The counter-cyclical nature of commercial real estate, coupled with low correlation to other asset classes (when invested in directly), can act as a defensive position during times of economic pullback. Over the long term, the value of real property in the US – including commercial buildings – has consistently gone up.

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5) Appreciation Potential

Under the right ownership, commercial assets are likely to appreciate in value. This implies that there is potential to garner additional returns when an asset is sold. At Excelsior, our primary focus is on capital preservation and stable income. Through our ownership strategy, we strive to create yield by leveraging current demand and maintaining high occupancy. Our approach is to drive growth in property values organically by steadily increasing rents with high quality tenants.

Commercial real estate offers investors stable cash flow, appreciation benefits, and substantial tax advantages when compared to other popular asset classes. What separates Excelsior Capital from other private sponsors and publicly traded REIT’s is our pure-play, individually syndicated asset platform. We believe we’ve created an investment return profile that far exceeds its incurred risk. We deploy capital on a property-by-property basis allowing our investors full transparency, reduced fees, and the ability to pick and choose the deals they want to participate in. The end result for investors is a custom real estate portfolio that is tailored to fit their needs.

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