“No recovery for U.S. property markets until 2017” was the headline Reuters ran on June 22, 2009.
At the time, commercial real estate values were expected to fall 50 percent from their peak in 2007. Building prices could take as long as six to eight years to recover, observers predicted.
Commercial markets were falling apart at an astonishing rate as rents dried up. Demand plummeted. There was close to no stability. Nearly $73 billion worth of commercial real estate loans were in distress.
Dallas Fed president Richard Fisher believed, “problems in the financial industry and commercial real estate have the potential to intensify.”
Vacancies were rocketing higher. Millions of square feet of space were under construction.
But then it all changed.
What changed to attract global investors to U.S. commercial real estate?
The bottom was reached. A recovery was at hand – occurring long before 2017 – as a low-interest-rate, high-yield marketplace attracted global investors to undervalued commercial real estate in the U.S.
But after years of booming prices and exceptional global interest, there are fears that the investment is in bubble territory, as Federal Reserve President Janet Yellen pointed out months ago.
Even Morgan Stanley is predicting that U.S. commercial real estate prices could be flat in 2016, despite previous forecasts for 5 percent growth.
Analysts are concerned that income generated from such properties won’t be enough moving forward to keep investors happy and help maintain returns in an uncertain environment of slowing earnings—and potential recession, as noted by Bloomberg.
A bubble forming for commercial real estate? Don’t you believe it!
But I don’t subscribe to the fears. What I can tell you is that the rewards from commercial real estate will continue to outweigh risks over the long term.
In fact, I still strongly believe this asset class should be a core component of all portfolios.
5 reasons commercial real estate should be part of your portfolio
Here are five reasons why:
No. 1 – Sustainable cash flow
A big advantage to owning property is that tenants pay you rent.
By doing so, investors have an opportunity to pull monthly, predictable cash flow from those property investments.
Oftentimes, cash flow is greater with commercial properties. Yields are higher per square foot in commercial buildings than with residential properties.
No. 2 – Extraordinary Tax Benefits
With real estate, investors are allowed to depreciate a commercial property’s value over a 39-year period and deduct it from taxes the same way you deduct expenses.
Landlords can deduct mortgage interest payments on loans that are used to improve or buy rental properties as well as on credit cards used for rental activities, such as repairs, for example. Of course, consulting with a tax professional is best.
No. 3 – A Hedge Against Inflation
Commercial real estate also serves as a great hedge against inflation.
According to Martha S. Peyton, Ph.D., author of “Is Commercial Real Estate an Inflation Hedge,” such investments had the highest correlation to inflation when compared to other assets like the S&P 500 and corporate bonds.
And, according to TIAA-CREF, “If inflation emerges, investors in commercial real estate will likely withstand it, according to the historical performance of the asset class. Over five-year holding periods historically, commercial real estate returns outpaced inflation nicely. Over short-term periods, commercial real estate returns have been modestly correlated with inflation, demonstrating their ‘inflation hedging’ capacity.”
No. 4 – Leverage Capability
As I note in my own book, “Winning With Commercial Real Estate,” if you can finance 50 percent of the purchase price of a commercial property, you own substantially more real estate for 50 cents on the dollar. You use other people’s money to achieve appreciation and cash flow.
If you leverage well—and properly—you stand to become wealthy. Over-leverage, and you stand to lose just about everything. Be smart with your investment dollars.
No. 5 – Offered Security
Commercial real estate is also considered a hard asset with intrinsic value.
The land has value, as does the building. If investors choose the location and building wisely, they can benefit, knowing they own an asset with a potential to generate income no matter what happens to tenants.
Overall, commercial real estate deserves a spot in smart investment portfolios. It’s how more than 45 percent of all millionaires in the U.S. made their money. With the leverage offered, the tax benefits and the cash flow potential, it just makes sense.
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