how investors make money in commercial real estate
investing in commercial real estate can be potentially lucrative and serve as a hedge against the volatility of the stock market investors can make money through property appreciation when they sell but most returns come from tenant rents investors can use direct investments where they become landlords through the ownership of the physical property people best suited for direct investment in commercial real estate are those who either have a considerable amount of knowledge about the industry or can employ firms that do commercial properties are a high risk high reward real estate investment such an investor is likely to be a high net worth individual since cre investing requires a considerable amount of capital the ideal property is in an area with low cre supply and high demand which will give favorable rental rates the strength of the area s local economy also affects the value of the cre purchase alternatively investors may invest in the commercial market indirectly through either ownership of various market securities such as real estate investment trusts reits or exchange traded funds etfs that invest in commercial property related stocks or investment in companies that cater to the commercial real estate market such as banks and realtors advantages of commercial real estateone of the biggest advantages of commercial real estate is attractive leasing rates in areas where the amount of new construction is limited by either land or law commercial real estate can have impressive returns and considerable monthly cash flows industrial buildings generally rent at a lower rate though they also have lower overhead costs compared with an office tower commercial real estate also benefits from comparably longer lease contracts with tenants than residential real estate this long lease length gives the commercial real estate holder a considerable amount of cash flow stability as long as long term tenants occupy the building in addition to offering a stable and rich source of income commercial real estate offers the potential for capital appreciation as long as the property is well maintained and kept up to date and like all forms of real estate it is a distinct asset class that can provide an effective diversification option to a balanced portfolio disadvantages of commercial real estaterules and regulations are the primary deterrents for most people wanting to invest in commercial real estate directly the taxes mechanics of purchasing and maintenance responsibilities for commercial properties are buried in layers of legalese these requirements shift according to state county industry size zoning and many other designations most investors in commercial real estate either have specialized knowledge or a payroll of people who do another hurdle is the increased risk brought with tenant turnover especially relevant in an economy where unexpected retail closures leave properties vacant with little advance notice with residences the facilities requirements of one tenant usually mirror those of previous or future tenants however with a commercial property each tenant may have very different needs that require costly refurbishing the building owner then has to adapt the space to accommodate each tenant s specialized trade a commercial property with a low vacancy but high tenant turnover may still lose money due to the cost of renovations for incoming tenants for those looking to invest directly buying a commercial property is a much more costly proposition than a residential property moreover while real estate in general is among the more illiquid of asset classes transactions for commercial buildings tend to move especially slowly hedge against stock markethigh yielding source of incomestable cash flows from long term tenantscapital appreciation potentialmore capital required to directly investgreater regulationhigher renovation costsilliquid assetcommercial real estate and covid 19the global covid 19 pandemic beginning in 2020 did not cause real estate values to drop substantially except for an initial drop at the beginning of the pandemic property values have remained steady or even risen much like the stock market which recovered from its dramatic drop in the second quarter q2 of 2020 with an equally dramatic rally that ran through much of 2021 1this is a key difference between the economic fallout occurring in 2020 and what happened a decade earlier what is not known is if the required remote work environment that began in 2020 for most americans will have any long term impact on corporate office needs companies have begun to roll out hybrid solutions requiring employees to return to the office for example in may 2023 amazon required employees to begin returning back to physical offices at least three days each week 2 however the commercial real estate has still yet to fully recover consider how american tower corporation amt one of the largest united states reits was priced at roughly 250 per share in june 2022 fast forward one year the reit traded at roughly 187 per share in june 2023 3commercial real estate outlook and forecaststhe u s commercial property market took a big hit during the 2008 2009 recession but it has experienced consistent annual gains since 2010 these gains have helped recover the recession era losses most research maintained that the property market remains healthy overall j p morgan in its 2019 commercial real estate outlook largely echoed this view commenting that 2019 was the 10th year of increases in commercial property rents and valuations 4after major disruptions discussed above as part of the pandemic the commercial real estate is attempting to emerge from an unclear state according to j p morgan chase remote and hybrid work have largely reduced demand for office space b and c class office buildings may face more difficult prospects but a class spaces with long term leases of at least a decade seem to be more favorably positioned to recover 5for the most part cbre agrees in their 2023 forecast cbre stated it would be a year more favorable for tenants in addition less than 38 million square feet of of commercial office space is slated for delivery in 2023 down 27 from the average of the past five years these supply constraints appear due to developers hitting pause according to cbre 6