How worthy is it to invest in the commercial real estate sector in the U.S?
When you think about the United States of America, you can not miss thinking about how big of a country it is. Being the third largest country in the world makes you automatically wonder about the real estate situation and what is it like to own/rent a property in the U.S.
For the past decade, the Great Recession has been the highlight of most news and its effect lasted longer than its actual period. It is the year the market crashed, leading to one of the worst economic periods since the Great Depression. The economical decline started in 2007 and lasted for 18 months, making it the second longest recession. All the subprime mortgages increased their adjustable rates and millions of Americans saw their monthly repayments increase. We are all aware that every single sector of the economy was hit hard, however the commercial real state sector has picked up on what was left faster than other core sectors.
Strategic prediction or a leap of faith?
After the famous relapse, the economic impact on the commercial real estate market unexpectedly witnessed a strong start. It recorded a 4.7% increase in national commercial real estate transaction volumes, compared to a year prior to that. All the professionals in the industry must wonder how good the real estate commercial sector has been performing. As of Q3 of 2019, the total size of the U.S commercial real estate estimated between $14 and $17 tn, however, market analysts believe that this growth will likely continue to start growing on a slower pace as interest rates are rising and jobs availability are beginning to decline.
Market analysts are still holding their conservative opinion regarding whether it is a good decision to invest in the commercial market in the U.S or not, however their optimistic views are very expressive.
Source: National Association of Realtors (NAR)
To buy or not buy!
If investing in commercial real estate is on the horizon of your plans, you might need to take a closer look on the pros and cons of such a move, rather than doing it at a later stage.
The advantages you will benefit from:
- Steady and potential income
Having a property in hands allows oneself to lay back and not worry about the income at the end of the month. This type of passive income remains considered one of the smartest ways and it is been found that income returns are hitting their highest peak at a rate of 9.85% quarterly. Although its normal annual return varies between 6% and 12%.
- Financial flexibility
As an owner who is planning to rent out a space, you would have the luxury of not handling the dilemma of any expenses related to the property. You will only have to worry about paying your mortgage, all the other expenses i.e. property taxes, maintenance, utilities, and insurance is up to the renter to deal with.
- The older the better
A property is a long-term plan, where each day passes by, your property’s value will most likely increase. And the other aspect of owning a CRE unit is that it gives you an objective overview of how much you should earn. If the property is becoming a profitable source of income, you have the right to request an income statement and base the price on that.
- Mutual interest, mutual profit
A landlord and a tenant shall be standing on the same ground and align their goals on benefiting from their professional relationship. Usually, tenants take pride in their work and invest in their businesses and that would reflect on the property itself.
While there are few reasons that positively encourage for investing in a commercial real estate over residential, few shortcomings come with hand;
- The Humble Gamble
It is absolutely up to luck when it comes to handing your property to a tenant, one of the main concerns for every investor is how to screen for potential clients. A CRE property receives hundreds of visitors daily, and if the tenant is as responsible as you hope, the property can be easily damaged from minor behaviours. That leading to a long-lasting effect as you will have to pay for the property’s maintenance, otherwise you might need to put your money in a residential property.
- Every minute counts
Property management comes with no vacations. If you own a commercial retail building, and assuming you have 5 tenants, you would have more in your plate to manage than a single residential building. As a landlord, you can’t be absent, you need to be active and fulfil your tenants’ requests.
- Competition Increase
This specific aspect marks a heated point of discussion because the competition is portrayed in many ways. First, you will face competitors fighting you for a better deal, then you will have to think about the tech-adoption and how CRE owners would not want to be left behind. Moreover, the main competition remains looking for the right tenant who would align financial goals and work on the same strategic direction.
With the uncertainty we are seeing now in the commercial real estate sector, many professionals are wondering if the market is going to crash again or is it time for stabilization. Although it is hard for analysts to predict the upcoming years and its effect on people, there are few factors that might indicate a brighter future;
- Millennials are more into buying.
- The unemployment rate is lower.
- New career opportunities are occurring.
- Real estate buyers are leaning towards cash deals.
- Taxes are getting lower.
That being said, whether you are selling or buying, you should take advantage of the current technological trends, keep your eyes open on the deals and most importantly don’t do it solo. Make sure you consult a professional real estate agent before making the simplest of decisions.