Timing your Commercial Real Estate Investments

Can you time the real estate market or can you time your investment in commercial real estate? If yes, how? Read on to find out.

Aug 4, 2022 3 min read

Commercial real estate (CRE) is normally a long term investment. If one includes the amount of money required to buy an asset or own a portion or fraction of a property, it is still quite a sizable chunk that cannot be ignored. Considering real estate is a rather illiquid form of investment, care must also be taken that when one enters or exits an investment therein, there’s no unaccounted liabilities that crop up during the same time. Thus, like with every other form of investment, timing matters in CRE investments as well. Timing your CRE investments helps you achieve a better degree of diversification in your portfolio, without making you worried about losing out on a particular opportunity entirely.

Real Estate Market Cycle and the Role of Appreciation

Commercial real estate is mostly insulated from the market volatility. That itself is a major bonus point when considering long term investments. What that also means is, unlike the stock market, you cannot really depend on how the market behaves in order to predict your profits. While rent returns are the reason to get into commercial real estate investment, the reason to stay is capital appreciation. Capital appreciation helps an investor grow their wealth in a significant manner while investing in commercial properties. So, the two major things to keep note of are - the demand of a particular type of asset in an area, and the availability of similar assets in the neighborhood. The typical real estate market cycle is 18 years and comprises 4 phases, namely - recovery, expansion, hyper supply, and recession. Unfortunately, unless you are in the cycle towards the end, it never really is easy to know when the said cycle begins. That is one more reason why Strata advises its investors to invest for the long term. With assets having lease tenures of 5 years and above, it is a prudent decision to stick around to see capital appreciation work its magic in increasing the value of the investment.

The Stable Asset Class with Unpredictable Performance?

The pandemic situation of 2019-2020 that caused economic slowdowns across the world, played a major role in affecting the real estate market cycle. Sure enough, recovery happened quite fast considering most other investment options had a rather slow uptake, but that also reinforces the point that timing the market does not really work well for commercial real estate. With the growth of ecommerce, supply chain and logistics required warehouses to operate smoothly, while store retail outlets suffered a setback. Hospitality and travel took a significant kick in the guts, while pharma, manufacturing and IT contributed to the demand of more spaces. Predicting a slowdown and pulling investments in CRE could have spelled disastrous for many.

Timing your CRE Investments

An investor has to focus on aspects of CRE that make it profitable in the long run, instead of going by how the general market behaves. Keep an eye out for assets that are well connected by major roads and popular routes, or are closer to seaports and airports. Presence of similar businesses in an area or the growth of a great talent pool in a particular city or town is a good indicator that future businesses might also consider setting up shop in the vicinity. Have a pool of assets to choose from - office spaces, manufacturing facilities, shop floors, malls, labs, storages or warehouses, et al. Major grade A buildings by reputable builders are great choices for office spaces. If the tenant is a business with international operations and good historical performance, chances are high that the office space will be renewed for further leases. A good office space investment should be targeted for a minimum of 10-20 years. These can have wonderful growth coupled with a decent appreciation rate. Generic warehouses can have single leases for 5-8 years, and while the capital appreciation on them might not be anything to write home about, they are a stable source of returns, since tenants will be easy to procure. Special purpose warehouses offer a better growth rate in terms of appreciation, but getting new tenants becomes a bit trickier. Ensure the tenant that leases such a warehouse has had smooth operations wherever it has had its presence. Manufacturing facilities, assembly lines, shop floors are another stable asset type that often undergo multiple lease renewals if the tenant is an established one. Overall, one should understand that 3-5 years of investment in CRE is not a time frame where you would expect something magical to happen. Staying invested in CRE for 10 years or more should be your goal. Keeping that in mind, ensure that even if you choose to buy an entire asset, invest through REIT, or own fractions of a property, do regular investments and choose different asset types that can offer you growth across a period of time.

To understand how fractional ownership can help you time your investments in CRE better, visit us at www.strataprop.com.