6 Reasons You Can Bet on Commercial Real Estate, Even in Uncertain Times
May 31, 2022
Headlines as of late have sparked a lot of uncertainty. Crypto currencies collapse. Stock market hits the lowest downturn since 2020. House values get cut. SBA financing hits 5.1% — what’s next? As an investor, where to you go?
Historically, commercial real estate investments tend to fair well during these downturns for several reasons.
- Power of leverage. Even though you are required to put down more money to purchase a commercial asset and even though conventional lenders will implement tighter and tighter lending restrictions, the power of leverage still protects you and your overall return.
- Tax Considerations. Financing deductions remain, thereby lowering your true cost of borrowing. You can also still depreciate your property to further reduce your tax burden.
- Cost Segregation. To protect your cash flow during hard times, you can use cost segregation to accelerate your depreciation through tax deduction. Required improvements to the property have special cost segregation advantages that were put in place in the Trump Tax Reform Plan, which is still in place today.
- Flexible Lease Terms. Commercial real estate allows you flexibility in lease terms. Currently, tenants as well as landlords prefer shorter term leases until they have a better understanding of the outlook. Issues such as office space usage, supply change delays, the reinventing of retail, and the emergence of new markets such as life sciences and new tech instrumentation markets all come into play when deciding on the length of leases. This allows an owner to not tie his property down to today’s rates so that when the market adjusts, they can benefit for any upside in rents and increase the value of the property.
- Valuable Asset in Any Market. The other important factor with commercial real estate is that it remains a hard asset to replace or add in most major markets. Land and acquisition costs plus delays in permitting and construction costs make it far more difficult than residential to replace. This creates a continued value effect on commercial properties, regardless of its current state of vacancy.
- The DST marketplace. While the lack of buildings on the market may create a challenge for investors, the emergence of the DST marketplace (Delaware Statutory Trusts) has been a solution. This allows an investor to invest in quality larger projects without managing the assets. You can choose your level of risk and return and enjoy real estate holdings without the management headaches. We are seeing several past clients now choosing this route to protect themselves under a 1031 exchange without having to buy another piece of real estate that they then would have to manage. DSTs are also a great way to enter commercial real estate if you have less money to invest. Typically, investments start between 50k to 100k minimum.
Crashes can and do hit commercial real estate, but most commercial assets are still selling — even in the hottest markets below replacement costs. If that continues long-term, you will always find commercial real estate to be a wise investment.
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Written by: Hans Hansson
Hans Hansson is President of Starboard Commercial Real Estate. Hans has been an active broker for over 35 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email [email protected] or call him at (415) 765-6897. You may also check out his website, https://www.hanshansson.com