Investing in Commercial Real Estate: Truth or Trend
- Aug 06, 2014
Is investing in commercial real estate a smart, long-term decision or a passing fad? According to David Kessler, national director of CohnReznick’s commercial real estate industry practice, it is “truth,” not a “trend.”
In fact, investing in commercial real estate can potentially provide solid upside to investors, especially those who can get ahead of the curve. But it can also be tricky if it is not thoroughly researched and properly chosen.
“I personally don’t believe that investing in any one arena is ever a ‘trend’ if it’s taken as a serious, studied, long-term endeavor,” Kessler told Commercial Property Executive. “Take the stock market versus commercial real estate: While each has its advantages and disadvantages, over the long haul I would say that real estate favors the savvy, patient investor looking for consistently solid returns.”
The advantages, he said, include twin upside potentials of continuous rental revenues derived from a successfully managed real estate asset combined with the almost inevitable appreciation of the property itself—tough to beat in any other area of investing.
According to Kessler, two other distinct advantages that investing in commercial real estate has over alternatives are a reasonably safe use of leverage due to the fact that real estate loans (mortgages) are usually long term, are fixed at low interest rates and are collateralized by the property itself; and over the long haul, there is demonstrably far less volatility in real estate investment than most other forms of investment (other than extremely low-yield bonds). This relative stability consistently makes for more robust portfolios with safer, steadier returns.
“I would add that, given the multiple political and economic upheavals facing the world and global markets today, our own country provides an extremely safe haven for inbound commercial real estate investment that has proven its stability and reliability for literally decades,” he said. “As with most important aspects of life, timing is extremely critical with respect to real estate investment, and the risk-return parameters have to be evaluated carefully.”
When investing in real estate, Kessler said the track record of the sponsor is very important. First, you want to understand the sponsor, their team, their experience, their investment strategy and their past track record. You also need to have firm confidence that their experiences are on point with the current investment thesis and strategy. For accredited investors, many options exist in local markets—directly with sponsors or through broker/dealer networks.
A recent study has shown that long-term net returns by REITs (available widely to the public) approximate those of private equity funds (largely only available to high-net-worth and institutional investors). Kessler finds this encouraging for retail investors who want to put money into real estate. Both publicly traded and many non-traded private REITs provide professionally managed investment opportunities.
“For both retail and accredited investors, investing directly in limited partnerships through the sponsor or broker/dealer is a good way to invest in real estate properties,” he said. “There are acquisition and development opportunities. Usually there is a preferred return allocated to the investors in the 8 percent range and splits that are close to 50/50 after the preferred return. If liquidity is desired, the public REITs provide the highest form of liquidity; however, there are also open-end funds or LPs that accommodate quarterly or annual exits based on NAV, but these are less common for the retail investor.”
Another option for retail investors is the crowdfunding route. According to Kessler, there are several credible and very active crowdfunding platforms specializing in raising capital for real estate transactions.
“This has opened up access to the general public to investing in limited partnerships in various property sectors, including development and acquisition,” he said. “Some platforms directly connect the investor with the sponsor, and some are structured where one invests in a single-asset fund sponsored by an affiliate of the crowdfunding platform.”