5 Reasons For Surge in Comm. Real Estate Market
Over the last few years there has been considerable attention being paid to the residential real estate market because of the buying frenzy occurring. However, this frenzy is not isolated to just the residential markets as commercial markets have also been seeing similar behavior as property sales for the commercial side was 16% higher than the year before. With these increases in property sales, it may have you wondering--why are we seeing these increases? The goal of this article is to explain some of the reasons we’re seeing such increases in the commercial real estate market.
1. Weak Bonds Forcing Alternatives
When traditional investments like stocks or bonds experience losses, it can drive those investors towards other investments. Those investments very often tend to be real estate. While the US Stock market reported record return on investments, the same could not be said of bonds. The increase in inflation caused the value of bonds to fall which forced investors to seek alternatives. This search for alternatives brought investors to purchasing commercial real estate. Although commercial real estate can be a riskier investment, that risk is subverted by the ROI it may provide. Commercial Real Estate can potentially bring in 6-12% annual returns.
2. Fed. Reserve Lowering Interest Rates
With the onset of the COVID-19 pandemic many investors believed that the commercial real estate market would be hit heavily; allowing investors to acquire distressed properties at ridiculously low prices. This was not the case, however. The Federal Reserve lowered interest rates which led to billions of dollars of loans to be given out in 2021.
The loans that were given out were then converted into commercial mortgage securities. These mortgage securities were then offered to individual investors, investment firms, and financial management companies as shares. With these shares, swaths of investors were able to invest into the commercial real estate market without having to pay the full--and usually high--price of the physical property.
3.) A Rise In Housing Prices
The housing inventory shortage is one of the reasons that average price of a home has skyrocketed in recent years. This skyrocketing price and the shortage of properties to buy has forced many potential homeowners to turn to renting as an alternative. This situation in the residential section of real estate caused many to start investing into apartment complexes. This effect can be seen as in 2021, multifamily property (apartments, duplexes, fourplexes, etc.) sales totaled over $300 billion--a 128% rise compared to the previous year.
4.) Small Investors & Non-Traded Real Estate Trusts
Real estate investment trusts (or REITs) have been a favorable option for investors as it allows them to purchase shares of a trust that invests in commercial real estate instead of having to purchase and manage their own properties. The hands-off approach to these trusts offers a less risky and affordable way to invest in commercial real estate projects. However, only accredited investors can typically invest into public REITs. The accreditation has a cumbersome list of requirements which usually includes high net worth and income.
These requirements has driven small investors to seek out the option of real estate crowdfunding --this opens up options to invest into commercial real estate transactions. The other option that small investors sought is open-ended funds. These ‘open-ended’ funds are also known as non-traded real estate investment trusts. These non-traded REITs accounted for a large percentage of the alternative investment market in 2021. A big part of the draw for these non-traded REITs is that unlike traditional REITs, investors can buy into these for as little as $2,500. Additionally, this option also offers an opportunity for big returns as non-traded REITs have been paying dividends of over 5% (which isn’t too shabby at all!)
5.) The Search For An Inflation Hedge
As mentioned above, the inflation rate has been increasing. This rise in inflation causes a spike in expenses for everything from rent to groceries. Another trouble is that many investments, especially investments with fixed rates, will take a hit on their returns. However, one type of investment that can stand up to inflation is commercial real estate properties. The stalwart nature of commercial properties is due to the ability to raise rental or lease rates to withstand the losses incurred from inflation. This loss mitigation spurred a record number of commercial real estate purchases!
These are only some of the reasons that you could see surges within the commercial real estate market. The market can be a very daunting and challenging thing to understand so do not hesitate to outsource to the many talented and eager real estate agents here in the city of Tucson, Arizona!