Commercial Real Estate: Still a Sound Investment Choice?

As the economy continues its gradual recovery, investors are active and are looking for the best places to put their money. A question we often get at Marcus & Millichap is, “How does the value of commercial real estate compare to other investment classes?”

Obviously, we work in the commercial real estate industry for a reason: We believe in the long-term value of investing in assets that deliver the strongest returns. When you compare investment options, it’s important to consider factors that will affect your returns in both the short and long term.

In today’s CRE market, we see three factors that are directly influencing investors’ returns:

• Global unrest — Flip on any news channel, and you see it. Conflict is escalating in Russia and Ukraine, Venezuela, and Africa. In a climate of uncertainty around the world, people look to put their money into hard assets like real estate. The United States is a relatively stable, growing economy, so investors from around the world have been increasing their investments in U.S. commercial properties.
• Stock market and other intangibles — The stock market has been on a bull run for about five years, which has been great. But today, we see people buying stocks on margin, so we believe the market is due for a correction.
• Borrowing is back — Once again, small businesses are borrowing money, which is a strong sign of confidence in the economy.

Why commercial real estate?

In addition to the appeal of investing in hard assets, investors see a number of other benefits in commercial real estate.

First, they have control. When you own property, you have direct influence over the success of that investment. You can control the management of the property, make improvements and change rent rates, and adjust your business model to ensure high returns. You don’t have that kind of control with stocks or bonds.

Second, the rate of return from other investment classes often cannot compare to real estate. Consider that the return on a 10-year Treasury bond is currently in the neighborhood of 2.6%, then compare that with the 5% and 6% cap rates available for many commercial property investments.

Finally, the market is in the midst of a perfect storm right now. Both buyers and sellers are getting great benefits. The historic low interest rates of the past few years have created an environment in which there are more buyers than sellers, so sellers can command top prices for their properties.

At the same time, even though interest rates have crept up, they remain attractively low, and the spread between interest and cap rates means that buyers can look forward to excellent cash flow from their properties.

In this environment, it’s possible for everybody to win. It’s a great time to be involved in commercial real estate.

Sincerely,

Richard Matricaria
Regional Manager, Tampa