The recent stock market collapse vaporized more American wealth more quickly than almost any event in history. “Black Monday,” March 9, 2020, saw one the deepest nosedives in the Dow Jones Industrial Average ever recorded. Two record-setting point drops followed that on March 12 and March 16. The March 2020 market crash included the three sharpest point drops in the Dow, one of the worst declines since the crash of 1929, the prelude to the Great Depression. We may recover much of our money, but the human lives taken are forever gone, and we grieve their loss.
Financial setbacks like this most often see investor capital take a “flight to safety” from stocks. Traditionally precious metals, oil, US Treasuries and real estate were among the destinations. Gold has recently been at its five-year high, the crude oil market is still unpredictable, and a 10-year US T-Bill is paying less than a point. In the face of unimaginable stock market volatility, real estate bought right, is a still a safe harbor today. From 1927 through 2019, the annualized average return for the S&P 500 was 9.8%. In many property categories, it is not uncommon for “buy and hold” commercial real estate investors to see returns of 7% – 10% on a ten-year hold. The potential volatility of the stock market has never been more apparent than today. On a risk-adjusted basis, commercial real estate is a very sound investment as part of a diversified portfolio.
There can be no doubt, commercial real estate market has been deeply shocked. Retail and hospitality most clearly. But life must go on, and the market will rebound. America is the most resilient county in human history. Bricks and mortar shopping patterns will change, but shopping will not cease. The virus has introduced millions of Americans to the convenience of tele-health. Widespread adoption may depress demand for medical office space, long term. In the short run, multifamily may suffer as delinquencies rise, some tenants double up, and others return to their parents. However, people won’t stop going to their doctors, and the multifamily industry will adapt and possibly thrive, as fewer people are able to afford a new home.
In 2008, the commercial real estate market was heavily leveraged. Much less true today. Then and in 1929, there were deep public policy flaws within our economic system. The current pandemic is an exogenous shock like that produced by 9/11 and Hurricane Katrina, but our recent economic fundamentals were very sound. Recoveries from four past epidemics, including the 1917 Spanish Flu, saw V-shaped recoveries in every case according to a recent report in the Harvard Business Review. The recovery will see many investors with the resources to buy and hold property with high vacancy, looking for bargains. They will improve and stabilize these assets. It’s a natural and beneficial cycle of decline and recovery.
Most of my clients are experienced real estate investors, but friends invested exclusively in securities who know what I do, sometimes ask me, “should I consider direct real estate investment?” I expect I’ll be getting a lot more of those calls now. The answer is “that depends.” If you are a business owner who plans to stay in place seven years or more, owning makes more sense in most cases than leasing based on numerous financial advantages. As an investor, if you have liquid assets of over $1 million and are prepared to invest at least $250,000, strong, safe and secure returns are possible.
One reason is debt or “leverage.” Leverage allows you to make more with your money. Buying stock with borrowed money is much too risky for the average investor. In using leverage to purchase income property, you can control a large amount of property with a small amount of your own money, often with little added risk. A simple example is a $1,000,000 property. Typically, a lender will require $250,000 down. If the property then sold for $1,125,000, the cash return would be 50%. If the property were purchased with no debt, the cash return would only be 12.5%.
No commercial real estate investment is without risk. Any investor must fully understand real estate and economic trends at both the local and national levels. If you are new to commercial real estate investment, you should consider engaging an experienced commercial real estate broker. Here are some of the reasons why:
Many first-time investors and business owners attempt to use public listing platforms like find a property. Or they’ll drive an area looking for “For Sale” signs. The reality is, searching listings, making calls to and appointments with the listing broker, visiting the properties, checking zoning, and researching values take a great deal of time. A broker can do all these things and more in a fraction of the time.
A seasoned commercial real estate broker will identify only those properties that fully meet your criteria. A good broker knows current market values and is a skillful negotiator, ensuring both his buyer and seller clients get a fair market price.
A broker employs a wide array of proprietary listing databases not available to the general public. Often, the broker can identify “off-market” opportunities by calling owners directly.
Market Knowledge and Relationships
An experienced broker looks ahead. Markets evolve. It has been said, “Buildings never move, but neighborhoods change all the time.” Demographic changes often affect the quality and desirability of a given market area. They can negatively impact property values, as when a new Interstate bypasses a once vital small town. The best brokers use their relationships with developers, lenders, appraisers and city planning officials to gain market foresight, ensuring your investment will pay off well into the future.
President Franklin Roosevelt once said, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” Wise words, never truer than today.