Commercial Real Estate Investing Rises

By Danny Prosky, Grubb & Ellis Co.

Parallel to the resurgence is the fact that last year the public non-traded REIT sector grew dramatically. It is anticipated to grow more this year as more properties come available and the capital markets engine kicks in once again.

According to Real Capital Analytics, commercial real estate transaction volume more than doubled in 2010 year over year, with sales totaling $115 billion, up from $54.6 billion during an anemic 2009.

This year, many expect continued growth, with some experts predicting a jump near 40 percent. Despite this continued rise in investment activity, a diverse spectrum of investors with capital to spend is still waiting on the sidelines to jump into the commercial real estate investment market as the large volume of real estate foreclosures are finally ready to hit the market.

Parallel to this resurgence in the commercial real estate market is the fact that last year, the public non-traded REIT sector grew dramatically. It is anticipated to grow more this year as more properties come available and the capital markets engine kicks in once again.

In 2010, the non-traded REIT sector raised $7.6 billion in equity, up roughly 17 percent over 2009, when the industry raised $6.5 billion. A record 42 non-traded REITs were offered in 2010 versus 30 in 2009, according to Blue Vault Partners, which tracks the non-traded REIT industry. Overall, the non-traded REIT sector accounts for nearly $70 billion in commercial real estate assets. Of this, REITs that have closed their equity offering own about $51 billion in assets while REITs that are still raising money have approximately $19 billion in assets.

The non-traded REIT sector will likely continue to expand in 2011, with more offerings coming to market and more investor equity raised. The easy explanation is that real estate has always been an attractive investment sector, and non-traded REITs allow smaller investors to enjoy many of the potential advantages that come with real estate investment, chief among these being income and stability.

When you look at the volatility of the stock market and the low yields of bank CDs and bonds, the median distribution of non-traded REITs at around 6.7 percent is quite attractive. And while the illiquid nature of non-traded REITs can be a detriment to some investors, the relatively stable nature of these long-term investments attracts others who seek higher yield absent the daily pressures of often erratic stock exchanges.

One thing seems clear: The non-traded REIT sector has become an increasingly popular option for investors who value real estate as a part of their portfolio allocation, and the sector is poised for continued growth as the economy and real estate fundamentals continue to improve.