Where do we stand at this point of the current real estate boom? Historically, commercial real estate has been cyclical, and now is a good time to assess: “Are there still opportunities to generate good returns?”
Relative to other investment options, my resounding response is“Yes.” Here’s why:
When added to a traditional portfolio of stocks, bonds, and cash, real estate offers potential diversification benefits and lower volatility. As an investor, if you compare today’s cap rates with treasury yields, real estate ROIs overall continue to provide a compelling advantage. And the stock market’s recent volatility is causing rising concerns amidst uncertainty, making investors nervous.
As real estate managers continue building portfolios, there is still plenty of liquidity in the market, making real estate transactions an even more attractive option. We continue to see plenty of capacity of both equity and debt in the market, providing an opportunity to take advantage of attractive deals more quickly and more easily than in years past.
Additionally, there could be more deals coming. Reviewing the numbers reveals there are $1.4 trillion in commercial real estate loans rolling over in the next three years. This presents an opportunity. The maturing debt forces current owners to decide to refinance or sell assets, which likely leads to more product in the market, and opening opportunities for deals. This is a similar scenario to 2010, when Velocis was able to take advantage of similar dynamics to secure a number of our portfolio’s best performing assets.
The decision to invest in real estate is not that simple, as within real estate and within this cycle all things aren’t created equal. For example, traditionally, investors have looked to REITs as a good option for a steady income-producing real estate investment. However, year-to-date, the stock valuation of REITs is down 10 percent, while direct real estate investment returns are up. And while many consumer costs are stable, construction costs with materials such as glass have risen more than 30 percent in the last year and a half. This rise in prices can add millions to the cost of construction.
The bottom line is this: There are still good opportunities to generate very good returns in the commercial real estate space. The best way to execute is with managers who have the ability and the track record to deliver a diversified portfolio and are adept at “leaning in” to specific markets and product types. Play the cycle wisely, and don’t get stuck in a single-dimension investment when the tide goes out.
Paul Smith is a principal at Velocis. Contact him at [email protected].
