Investing in Commercial Real Estate in This Environment – Good Idea?
Submitted by D. Saperstone
By definition, commercial property is used solely for business purposes. A very broad generalization of “commercial property” but strangely accurate. Shopping mall, offices buildings, apartments, gas stations, hotels and industrial parks are all commercial properties and represent investment opportunities for those investors who can tolerate some degree of risk. Unlike residential development projects which have suffered mightily over the past several years due to the sub-prime lending crisis, commercial investment grade properties have escaped much of the carnage. Commercial properties have certainly taken a bit of a hit during this time frame but we liken the damage to a flesh wound as opposed to a life threatening direct hit. There are several reasons commercial real estate has been able to survive the sub-prime mess and in some cases actually prosper as the US housing market crumbled under the weight of poorly underwritten mortgages:
- Commercial real estate leases tend to be long term. Therefore, project rents continue to generate a steady stream of cash for investor/owners for quite some time, even in troubling times.
- Residential developers have a history of grossly over building in boom times. Apparently, the thinking behind this strategy is that the good times never end. As we all have witnessed, the boom times do end and, in most cases, excess residential inventory takes years to absorb. Commercial developers, on the other hand, have shown great restraint over the past decade in an effort to protect property values. This conservative approach was a lesson hard learned during the real estate collapse of the early 1990s.
- It is well documented that the laxity of residential underwriting standards led to the current financial crisis plaguing our economy. At every level, residential underwriting standards evaporated in one great, shameless exhibition of unbridled greed. To a considerable degree, the failings of the residential underwriting process have been regulated out of commercial lending. It is certainly more difficult to acquire long term financing for commercial projects and terms are far less generous than they were a years ago but money is available. We have not witnessed, nor do we expect to witness, the same unraveling effect that decimated the value of residential properties.
Is this a good time to acquire real estate assets as part of a balanced portfolio? We unequivocally answer YES! The performance of some classes of commercial real estate assets will exceed others, for instance apartments versus retail, but in our opinion, both will produce better results over the long haul then non-real estate options. Smart investors do their homework, study risk and find strength in every market. In our professional opinion, this is a very good time to invest in commercial real estate.