Bright Spots Amid Commercial Real Estate Struggles
The office market continues to grapple with pandemic fallout, but investors find attractive deals in retail, industrial and hotel sectors.
The landscape for commercial real estate may look dismal from afar with high interest rates and an office space market still in shakeout mode, but pockets of opportunity remain for investors with the right approach and strategy.
Some — but by no means all — commercial real estate segments (particularly the office market) bore the brunt of the post-COVID upheaval. Even prime properties have seen ratings downgrades. Community and regional banks have been reluctant to enter the space as bank regulators and rating agencies keep a keen eye on exposure to deals on shaky footing.
But in spite of those developments, there are categories that look attractive for investors, including the retail, industrial and hotel sectors.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Major fund sponsors are creating new vehicles for investment. Sellers are accepting deals they wouldn’t have considered a year or even six months ago. The seemingly unyielding rise in interest rates may be coming to an end, considering Fed officials’ recent comments.
“Hot” markets such as Austin and Phoenix are still relatively highly valued and probably best avoided. But potential returns are inviting in some smaller markets like San Antonio, Albuquerque, Birmingham and Tulsa.
Some long-term opportunities
There are some good long-term opportunities, too, in the Northeast and Midwest. Milwaukee and Detroit have stabilized. Minneapolis has a stable of Fortune 500 companies, a strong university presence and a great recreational market, making it an interesting prospect. Indianapolis is among the Rust Belt communities seeing growth with what appears to be a resilient economy that is home to several companies with staying power.
Boston, Philadelphia and Atlanta have diverse business bases, as does Washington, D.C., which is also getting Amazon’s HQ2 and has the federal government ordering workers back to the office. Newark, N.J., still gets a lot of bad press, but the logistics and industrial market there is second to none.
Still, there aren’t shiny deals under every rock. Lenders won’t touch San Francisco, for example. The city has lost a material portion of its talent base, and the appeal of its natural beauty has waned in view of other detractions. It’s going to take a lot to bring the city back.
Financing and interest rates are a hurdle
More broadly, despite the opportunities and the easing of rising interest rates, financing remains a hurdle. When debt isn’t available, a potential buyer needs to find a seller that’s willing to carry the mortgage while the property is leased, renovated or otherwise set up to make money. It’s going to take creative financing to make the market come back to full health.
A buyer who is fiscally prudent on the management side — that means not spending money on amenities that have no value to a tenant — and a reasonable medium- to long-term view on real estate will be able to find deals that generate positive cash flow, even before tax benefits.
There remains a great deal of uncertainty and turbulence in the commercial real estate sector. As the bottom fell out of the office market, rates were changing so fast people couldn’t figure out what buildings were worth.
But by this time next year, it should be clear that cap rates and yields have peaked. Property values are very likely to rise, and many investors will wish they had been more aggressive. Those who did buy will be able to refinance and see respectable returns.
Be aware, too, there are new complexities. Artificial intelligence, for example, will be a game changer for real estate just as it will be in other industries. Not only will the way properties are analyzed and managed changed — the tenants and users of buildings are likely to be changed by AI, too.
What will become of the office market?
As for the current ugly duckling: The office market will at some future point come back. Many people are finding it’s not as easy to work from home now that not everyone is doing it. Companies and bosses are fully cognizant that innovation and productivity were higher with workers gathering in proximity to one another. While versions of remote work will persist, there’s now a clear trend back to a more traditional direction.
The pandemic created a wildly distorted market, and investors are always spooked by market distortions. Some commercial real estate sectors have taken the brunt of that impact, but commercial real estate overall will continue to be a stable asset class.
And any investor who’s not searching for cash flow-positive deals is likely to regret it next year.
related content
- WFH Impact on Commercial Real Estate Market: Kiplinger Economic Forecasts
- How Commercial Real Estate Investing Can Add Balance to Your Portfolio
- REITs Unveiled: A Comprehensive Guide for Investors
- Qualified Opportunity Zones With an Energy Boost
- One Way to Stay Ahead of Inflation: Qualified Opportunity Funds
Jim Small is the Founder/CEO of Sante Realty Investments, an impact-based real estate company. For over 10 years, he has partnered with ultra-high-net-worth individuals and family offices to acquire and manage thousands of multifamily assets across the U.S. and Europe, generating consistent returns and positive social impact.
-
-
Tips for Renting Out Your Home on Airbnb
real estate Here's what you should know before listing your home on Airbnb.
By Miriam Cross Published
-
Does Financial Fear Have You Spooked? Don’t Cower — Fight
Take a page from the heroes and heroines of scary movies and conquer the monsters that are keeping you from tackling your money fears.
By Neale Godfrey, Financial Literacy Expert Published
-
Does Financial Fear Have You Spooked? Don’t Cower — Fight
Take a page from the heroes and heroines of scary movies and conquer the monsters that are keeping you from tackling your money fears.
By Neale Godfrey, Financial Literacy Expert Published
-
Is Someone Sabotaging Your Company? Is It You?
Leadership expert outlines ways that leaders thwart the success of their own companies. Knowing what not to do can make clear what they should do instead.
By H. Dennis Beaver, Esq. Published
-
Should You Own Crypto if You’re Retired?
Pandora’s box might have just popped open, but let’s take a crack at making some suggestions that could help you to answer that question based on your own situation.
By Evan T. Beach, CFP®, AWMA® Published
-
How a Small Business Can Find the Ideal Banking Partner
Your financial institution should provide your business with more than checking and savings accounts. It should have a vested interest in your success, especially during uncertain times.
By Kevin Brauer, MBA, CPA, CMA Published
-
This Halloween, Consider a Phantom Stock Plan
Business owners could use a phantom stock plan to incentivize key employees without having to share control of the company.
By John M. Goralka Published
-
Three Ways You Can Flip the Script on Your Taxes
Does it feel like the tax code is beating you up at times? Instead of accepting that feeling of getting pushed around, here’s how you can pay what you must but no more.
By Scott M. Dougan, RFC, Investment Adviser Published
-
Comparison vs Purpose in Financial Planning: Forget the Joneses
Here are some steps to help you focus on the purpose of your own financial planning rather than comparing or trying to emulate what others are doing.
By Frank J. Legan Published
-
Three Planning Ideas to Make Your Money Last in Retirement
It’s National Retirement Security Month, a good time for everyone to consider developing strategies that help them outlive their retirement funds.
By Dylan Tyson Published