If you have mastered residential property investing and are ready to move up, you’re probably looking at commercial real estate (CRE) investing as your next logical step. But is it even a good time to get into this industry, given the uncertain economy? Moreover, is it worth investing in commercial properties to diversify your portfolio?
In this blog, we’ll talk about whether or not it makes sense to get into CRE investing at the moment and how you can dip your toes in the world of commercial properties without going broke.
But first, what qualifies as commercial real estate?
Commercial properties refer to any building or structure used to conduct business activities and large residential buildings with more than five units. It covers a wide array of structure uses and types, including the following:
- Residential condos and apartment buildings with upwards of five units
- Retail shopping centers
- Industrial complexes
- Medical offices
- Resorts, hotels, and motels
- Office complexes and buildings
- Mobile home parks
- Self-storage facilities
Does it make sense to invest in commercial properties right now?
The answer depends on your risk profile and access to capital. First, let’s talk about the current state of affairs.
The pandemic and the resulting lockdowns have driven unemployment rates to 23% and have caused the GDP to plummet by 38%. Commercial real estate—particularly the retail and office sectors—is no doubt taking a huge hit. However, the demand is also felt in other categories, most notably in hotels and hospitality.
During the height of the health crisis in 2020, office occupancy posted a record decrease of 41 million sq. ft. while retail occupancy decreased by 13.6 million sq. ft. in the first quarter of the year. In addition, commercial real estate prices and sales have slowed down across all property types except industrial structures. Meanwhile, industrial space occupancy rose by over 62 million sq. ft.
The October 2020 ‘commercial property trends and outlook’ report from the National Association of Realtors had exciting findings. This was what their survey respondents said:
- 54% of them saw an increase in either missed, partial, or late rent payments in their retail, industrial, and office properties
- 43% of served an increase in leasing transactions in suburban areas vs. cities
- 83% saw an increase in staggering office schedules
- 52% reported increased repurposing activity (turning vacant malls into industrial spaces or warehouses, etc.)
Given all this information, you may wonder if now is the right time to put money into commercial real estate. And the answer is, it depends.
Specific sectors—particularly office, hotels, and retail—continue to experience uncertainty, but the shockwaves don’t seem to have reached all commercial property types. That’s because most commercial leases tend to be longer-term (at least two years), which means that many retail spaces and office buildings are in what can be called a ‘plateau,’ waiting for leases to expire.
The overall sentiment is that things will quickly go back to normal when most of the population has been vaccinated, and lockdowns are eased. This is why many office building and retail building owners are optimistic. It’s also interesting that there seems to be no ‘fire sale’ in the commercial and office segment—at least not yet. As a result, these sectors seem to be holding up well even though prices and sales volume have dipped.
Because of these trends, commercial property investors with a risk appetite think that the best time to jump into this industry is now.
That said, outright ownership of commercial properties such as office complexes and large apartment buildings is often too expensive—not to mention too involved—for the average real estate investor.
Getting into the world of CRE involves many risks and a lot of capital, usually a down payment of 30%. However, it also involves hands-on management, and it is hardly passive in most cases.
What’s more, succeeding in this industry often requires years of experience and commercial real estate know-how. Mistakes can be catastrophic for a portfolio. After all, it’s much harder to get back on your feet if you make a mistake buying commercial property than if you bought a handful of single-family homes.
So what should you do if you want to get into commercial property investing but are not quite ready to own and manage your building? The best way to start is to put money in real estate investment trusts (REITs) and crowdfunding platforms. So let’s talk about these options.
Real estate investment trusts are perfect for small investors who want to make money from commercial properties without finding, buying, and managing these buildings themselves. So it’s no surprise that REITs can be found in some of the most solid investment portfolios of the wealthiest people on earth. After all, REITs are required by law to take 90% of their earnings and paid out as dividends.
Investing in REITs is a great way to add commercial properties to your portfolio. Most REITs invest in various property types, including storage facilities, industrial spaces, assisted living facilities, retail and shopping, office buildings, apartments, and more.
You don’t have to be an accredited investor to start. It’s also possible to create passive income from this investment instrument. There’s less risk, too, because professionals are managing the portfolio for you.
That said, REITs are notorious for having high upfront sales loads. These fees can add up and are much higher than what you would pay in exchange-traded funds and mutual funds. So make sure to do the math on this before you start investing.
If you’re interested, you can start buying publicly traded REITs from any broker. They can be purchased as preferred stock, common stock, or debt securities. In addition, some REITs are built into exchange-traded funds.
Commercial real estate crowdfunding platforms
Are you an accredited investor? Then this might be a good option for you. Crowdfunding platforms that focus on commercial properties let you invest in CRE with much less money, less risk, and less know-how. The minimum amount required is as low as a few thousand dollars on some platforms. With little money, it’s possible to purchase a share of a commercial real estate loan or mortgage.
Crowdfunding has been around for more than a decade now, but it became famous because of the JOBS (Jumpstart Our Business Startups) Act of 2012. As a result, now more than ever, many platforms offer commercial deals for all kinds of investors.
The key to succeeding in using these crowdfunding platforms is to perform due diligence. The good news is that it’s easy to do this because most (if not all) of the documents you need to see are often made available on the platform itself.
Commercial real estate remains a good investment vehicle for people looking for a higher income potential, multiple cash flow streams, less competition, reduced risk from longer leases, and risk diversification. However, there are ways to get into this industry without having to bet a lot of money. You can start by investing in commercial properties through crowdfunding platforms or real estate investment trusts.