Is Commercial Property A Good Investment Right Now?

The US economy as a whole is looking healthy, with economic growth at a steady pace, unemployment down to its pre-recession levels and consumer confidence on the rise. …

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The US economy as a whole is looking healthy, with economic growth at a steady pace, unemployment down to its pre-recession levels and consumer confidence on the rise.

Despite the unstable nature of the market during the recession, the commercial property market remained resilient and these positive economic trends are continuing to support the industry today.

Collective analysis from The National Association of Realtors NAR’s Expectations and Market Realities in Real Estate 2015 report also has an optimistic outlook.

According to NAR’s report the fundamentals are improving, interest rates are low and pricing is increasing alongside volume. It also showed solid returns last year as commercial property reached ‘$288.5 billion in transaction volume’ by the third quarter of 2014 across all boards (bar the apartment sector) making it an attractive investment option.

There are many advantages to real estate investments; for starters, they are typically valued based on their usable square footage, whereas this isn’t the case for residential properties.

And with commercial property the cash flow is often greater, resulting in a higher yield – especially for properties with multiple tenancies where the risk becomes diversified. If you buy an apartment block and you lose one of your tenants the impact is far less than losing a whole household.

Commercial properties also have longer leases than residential properties making them a more sustainable long term investment.

Professional services network Deloitte state in their 2015 Commercial Real Estate Outlook that ‘the sector is poised for strong growth over the next 12 months’ due to the ‘availability of financing through traditional and non-traditional channels’.

Due to the banks increasing their lending capabilities and easing their standards last year there is strong capital availability and with the rising popularity of alternative funding, potential investors are also considering their options.

Sustainability and technology are becoming more influential in tenants’ leasing decisions and green bonds are just one of the alternative financing options available to the eco-minded investor.

These fixed income instruments with bond proceeds tied to environmentally friendly investments can be used to finance sustainability efforts (ie. Retrofitting of existing buildings to make them LEED certified).

Another popular approach to financing is crowdfunding, providing a platform for investors to raise capital with the help of other individual accredited investors.

According to the Wall Street Journal, the real estate industry in the US is now one of the leaders in leveraging this method of funding with approximately $135 million of capital raised in June last year.

Deloitte also highlight geopolitical stability as one of the main drivers of interest towards the US commercial real estate alongside technology and innovation in the market.

Dr Daniel Bachman, Senior Manager of Deloitte’s US Macroeconomics, states that ‘the stability will benefit the United States, which is likely to see acceleration from the relatively slow growth rates we’ve experienced in the past few years’.

He also believes that the US is ‘gaining traction as the preferred investment destination’ as the market has seen a wave of foreign interest and is now regarded as a ‘safe haven’ for overseas investment.

According to property developer Knight Frank’s Global Cities report, the American commercial property market is also diversifying.

Calling it a ‘new era of abundant energy and perpetual technological change’ the report states that the current economy is creating more opportunities for commercial property investors.

Technological advancements have become an integral part of growth in the market as the higher demand for sustainable and intelligently built buildings have  become a business imperative.

Another catalyst driving the current demand and growth in the commercial property markets is ‘the unprecedented policies of the Federal Reserve’.

These policies, through maintaining low-interest rates and encouraging businesses to hire, have spurred investors ‘into riskier, higher-yielding assets, including commercial real estate’.

With strong fundamentals, diverse funding sources and a global reputation as a ‘safe haven’ for investment, commercial property remains an attractive investment – and it looks like sustainability and innovative design will be at the top of developers’ wish lists. 

 

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