How to Diversify Your Investments With Commercial Real Estate

Diversifying your investments is always a good idea. And in an economic moment like the present, it's a borderline necessity when the market looks to be approaching a volatile period.

For investors in residential real estate looking to upgrade their portfolios while scaling down their risk, commercial real estate offers an exceptionally safe and lucrative harbor. The commercial real estate market is much more insulated from market shocks than the residential market. The returns can be very attractive — often on par with top-quality investments like dividend stocks.

Let’s look at some of the unique pros and cons of investing in commercial real estate and some of the best ways to allocate your money in the commercial real estate world.

What Makes Commercial Real Estate Investing Unique

Commercial real estate investing is different from residential real estate investing in some fundamental ways. First of all, there’s more money involved. The average commercial property has a higher price tag than all but the highest-end residential properties, so it’s tougher to buy in.

Those high stakes also necessitate more careful analysis. While a simple comparative market analysis is great for residential investments, a commercial real estate investment demands more in-depth number-crunching.

However, that high price tag has an upside. Commercial investments are based more on careful analysis rather than heated speculation. Since relatively few investors can participate, there’s much less competition in the market.

Commercial properties also come with long, multi-year leases, ensuring a steady cash flow. Returns on a typical commercial investment are 6% to 12%, much higher than the standard residential return.

Finally, commercial properties can be extraordinarily low-maintenance. While residential rentals can be pretty low-maintenance if you work with a property management service, property managers also eat up a significant percentage of your rents. Using a triple net lease for your commercial property means the tenant pays maintenance, taxes, utilities, insurance, and everything but the mortgage. While triple net leases come with slightly lower rents than leases in which the owner foots some of these costs, they’re still much more lucrative, on a dollar-for-dollar basis, than professionally managed residential properties.

So what are the best ways to diversify into commercial real estate? Let’s look at some of the most popular paths.

Using a Transaction Sponsor

If you want the most streamlined, low-maintenance commercial real estate experience, putting your money into a project led by a transaction sponsor is likely the best way.

A transaction sponsor scouts out potential commercial projects. When they find one that’s promising, they negotiate a purchase agreement, assemble investor materials, and bring in the capital needed to buy or renovate the property.

You don't have to do much as an equity investor in a project like this. The transaction sponsor will oversee and is responsible for every phase of the project, from pre-acquisition due diligence through to the final disposition of the finished product.

To maximize diversification, allocate money to several different transaction sponsors. Since most sponsors specialize in various projects, you’ll likely have money in various properties.

Diversification Through Types of Commercial Real Estate

There are four main types of commercial real estate; allocating your money among them can further insulate you from risk. The main types are:

Industrial

This type includes buildings like warehouses as well as production or logistics facilities. Industrial properties offer excellent cash flow and low operational risks but are vulnerable to market downturns. They’re also typically quite large, which translates to high upfront costs.

Office

Office spaces offer excellent stability for investors, as leases are typically long and come with low tenant turnover. However, one of the significant downsides of a long lease is the few opportunities for rent increases. On top of that, there may be high upfront costs if an office space needs to be customized for a specialized client, like a medical facility.

While office spaces are typically stable even in volatile economic times, the rise of remote work during the pandemic has cast the future of office space into doubt.

Retail

Tenants like retail shops, gyms, entertainment properties, and bank branches use these properties. Similar to office space, retail spaces often come with long leases. On the downside, retail tenants are vulnerable to market changes and sometimes go bankrupt. Because the spaces are highly customized, expensive renovations are often necessary between tenants.

Multifamily

A commercial multifamily property has five or more residential units. While these properties are well insulated from economic turbulence, they come with the labor-intensive obligations of smaller residential investments — for example, property management costs and high tenant turnover. Despite their residential nature, these properties are still considered one of the core types of commercial real estate.

The genius of diversifying among different commercial real estate types is that you can take advantage of every market condition. For example, in a booming economy, you’ll reap the benefits of owning industrial space, and when the market enters a downturn, your multifamily investments will weather the storm.

Diversifying Through Property Classes

Savvy investors can also allocate their money to and invest in real estate along different commercial properties. Commercial property classes are:

Class A

This is the highest quality commercial property. Typically, the property is new, well-maintained, and centrally located. Consequently, it offers shallow risk and very predictable returns.

Class B

The second-highest commercial property class is usually between 10 and 20 years old, in need of minor renovations, and in a decent but not top-quality market. This property class offers slightly more risk but can give investors great returns if correctly managed.

Class C

Older properties (usually between 20 and 30 years old) require moderate repairs. Nearing the end of their usable life, they’re also located in fringe areas and require prudent management to deliver a consistent return.

Class D

These obsolete properties may require significant renovations or repairs to get back to acceptable conditions. Their very low buy-in could yield considerable profits to an innovative manager, but they could also result in a total loss.

Again, allocating investments among every class can offset risk and maximize profit. A Class A investment will consistently bring in cash flow, while a handful of lower-class assets can result in exponential gains.

Diversifying by Location

Finally, allocating money among different geographical locations allows you to avoid being too tied up in the fortunes of any one market. Especially as issues like climate change threaten prime coastal markets like Miami and water scarcity threatens prospects in the West and the Sun Belt, it’s essential to keep “location, location, location” in mind.

The Bottom Line

Commercial real estate investments offer a viable and reliable sector into which to invest capital and diversify your portfolio. It’s worth exploring various asset classes, locations, and property types to find the best investment property. And, of course, when in doubt, it’s best to talk to an experienced commercial real estate broker to gain detailed market knowledge before you buy and receive guidance throughout the investment process.

 

Source: How to Diversify Your Investments With Commercial Real Estate | Crexi Insights

https://www.creconsult.net/market-trends/how-to-diversify-your-investments-with-commercial-real-estate/

Bridging The Bid-Ask Divide: Brokers On Getting Past Who's Going To Blink First

As rising interest rates and economic volatility have stifled buying power for investors over the last six months, commercial real estate sellers often have found themselves somewhat of a standoff with potential purchasers.

Who will make the first move in adjusting expectations?

For the brokers sitting in on those negotiations daily, it comes down to serving both sides a dose of reality about market conditions. And that isn't accessible medicine for buyers or sellers to swallow right now.

"The reality is, sellers still want 2021 pricing, but buyers just can't step up to that number," Joe Powers, regional manager of Marcus & Millichap's Chicago downtown office, told Bisnow.

The bid-ask spread between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept proved to be a challenge in 2022 and continues to be one into 2023.

"It's become more important now, I think, than in recent years because, for a while there, you could throw a number out there, and someone would grab it, whereas now, real information is dictating the market," Powers said.

In office space especially, the bid-ask divide has become particularly wide, reaching a spread of about 30%-40% as of November and December 2022, according to Wei Luo, global associate research director at CBRE Investment Management. Before the pandemic, the bid-ask spread hovered around 10%-20% for offices.

"It's common for a spread between the bid and asks. That's why we need brokers," Luo told Bisnow. "It's not uncommon, but I would say once the gap reaches beyond 30%, that's when the sector has a problem. That's when activity will be coming to a standstill. ... When people go to a negotiation, they're not expecting to cut 20% off their price."

In its 2023 Trends to Watch in Real Assets report, MSCI estimated that London office prices would need to fall 29.3% from October 2022 levels, and New York offices would need to drop 10.4% to bridge the gap between what sellers want and buyers are willing to pay, Bisnow reported.

Meanwhile, CBRE predicts another 5%-7% decrease in investment values in 2023, coming off a 10%-15% decline across the first three quarters of 2022.

"As the market has become more difficult the last four to six months, people have struggled with, from a sell side, how tough do I become, and from a buy side, how much am I willing to move up?" Steven Weinstock, regional manager of Marcus & Millichap's Oak Brook office, told Bisnow. "The sellers have been unwilling to move because 'I still own the real estate, so why am I going to make the first move? Nothing is causing me to make the first move.'"

In the case of office buildings, the spread is starkest when it comes to the differences between modern Class-A buildings and older buildings.

"When more modernized offices have become available, I think that's when you start to see that spread because investors now realize the bifurcation has begun, so you have two different assets — one that's kind of future-proof, one that's going to be obsolete at some time in the future," Luo said.

Office buildings that might have been built in the 1980s or '90s and weren't well maintained are bearing the brunt of the hit to their values, mainly as the pandemic brought into question the future of the office, Luo said.

However, new developments built with environmental, social, and governance principles in mind and modern amenities have seen demand outpace supply even in a downturn as investors participate in a flight to quality, she added.

"For any owners that are trying to sell right now, their goal is to get liquidity," Luo said. "They want to sell the office asset they own to get capital, to get cash so that they can recycle the capital into better-performing assets. But for the buyer who's in the market trying to buy an office, they want to buy low and sell high. They're looking for discounts when the owners are looking for capital."

Because both sides have misaligned goals and differing price expectations, Luo said, "it's tough to bridge when you're in such a tightened credit condition."

Luo said that retail, industrial and residential properties face price adjustments based on higher borrowing costs, but the bid-ask gap is relatively small compared to the office.

If interest rates stabilize, that will help close the gap, but office owners, in particular, will need to take some write-downs, which she said they have already started doing,

"Many office investors in the industry have started to do that because that's the reality. We can't bury our heads in the sand," Luo said.

Widening the pool of potential buyers has helped sellers become more realistic and get a sense of fair market value for their assets. 

"The bid-ask gap has become a 'who's going to blink first?'" Weinstock said. "Sellers have started blinking. They started saying, 'I got enough offers. I have enough interest. I know what the market pricing is. Even though I wanted more, if I want to transact, I've got to take the market price.'"

"It works if you take a property and bring it to market, expose it to the most people, and create competition," Weinstock said.

"In 2001, money didn't go across state lines. You stayed local," Weinstock said. "In 2023, you're not concerned where the property is anymore, so it's become very robust."

"There are two reasons why a property doesn't sell. It's either exposure or pricing, and if we've been able to generate multiple offers from qualified buyers, the market has spoken, and it's a function of pricing."

During this time of economic turbulence, WHe said Weinstock encourages sellers to sit down with their financial advisers to discuss their options, which aren't just to sell or own anymore; they can also decide to hang onto their assets and make improvements or to refinance and use the additional capital for other investments.

Industry players told Bisnow they see the gap narrowing by year's end.

"We always come out of it, and statistically, mathematically, the succeeding 12 months after whatever economic uncertainty there is have always produced a significant gain for the commercial real estate market," Weinstock said. "All we have to do is help our clients during this turmoil, however long or short."

 

https://www.creconsult.net/market-trends/bridging-the-bid-ask-divide-brokers-on-getting-past-whos-going-to-blink-first/

What is Tenancy in Common in Commercial Real Estate?

Tenancy in common (TIC) is a real estate transaction in which there is more than one owner of a specific property. It is not an uncommon situation, but it can have both good and bad factors related to it. Understanding tenancy in common in a commercial real estate transaction is a critical step if this type of structure will be used.

What Is Tenancy in Common?

TIC is a type of ownership structure. In this transaction, more than one party will own the same property. There are some situations where this can be good, for example, because it can make it simpler for borrowers to get the financing they need for a property. However, TIC can also come with several legal and sometimes more complex complications when the owners do not have good practices.

There are various situations when this could occur. For example, it can be set up through paperwork by two or more parties as co-owners during the purchasing process of commercial real estate. It could also be a default situation under the state's property laws. Sometimes it is necessary because one person or organization can't hold the property alone.

How Does TIC Work in Commercial Real Estate?

This legal arrangement occurs when two parties (or more) share commercial real estate ownership rights. In this arrangement, the owners may share privileges and interests in all aspects of the property. While they share those interests, they can have different levels of rights or percentages of their overall interest in the property.

This type of agreement is flexible in that it can be created anytime. It is possible to add a new tenant in common at any time during the ownership, even after other parties have entered the agreement.

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Tenancy in Common vs. Joint Tenancy

What is the difference between joint tenancy and tenancy in ordinary?

It is not uncommon for a property that more than one individual owns to be a joint tenancy rather than a common one. When it is a joint, the structure must conform to a specific set of rules or standards. These are often called TTIP. These standards require that each joint tenant must start their ownership of the property together.

In addition, it must be documented on the property's deed – the same deed. In addition, each joint tenant has to have the same type of ownership share in commercial real estate. That includes providing equal possession rights to the property. In many situations, a joint tenancy becomes a TIC when one tenant decides to sell their portion of the property's ownership to another joint tenant or party.

This is very different from what can be expected in a TIC situation. For example, it is not uncommon for each tenant to have a different percentage of ownership shares in the property. In some cases, one party may have a 30 percent stake of ownership and the other 70 percent, or any further configuration. Unlike joint tenancy, all parties must have the same privilege level.

Another difference is that the ownership of the property does not have to occur at the same time as it does in joint tenancy. Instead, adding a new tenant at any time is possible, which is not uncommon.

Another significant difference is that when a commercial real estate investor dies in a TIC, the property's share does not automatically go to the other property owners. That's what occurs in a traditional joint tenancy. In a TIC, though, the property owner can pass to the named heir of the tenant.

What Are the Benefits and Drawbacks of TIC?

When considering tenancy in common in a commercial real estate transaction, it is critical to know the pros and cons of this scenario. Considering living in its ordinary meaning, consider the following.

Advantages of Tenancy in Common

There are numerous benefits to this arrangement.

For example, it allows for the property to be purchased. In other words, all aspects of the purchase are more accessible, allowing all parties to participate. This includes dividing up the down payment, maintenance, upgrades, and payments.

In addition to this, in comparison to a joint tenancy, a TIC can allow the tenant structure to change over time, meaning that more people can be added to it. Also, different degrees of ownership are permitted, providing more flexibility than a joint tenancy.

Disadvantages of Tenancy in Common

There are some disadvantages of tenancy in common also to consider.

For example, when a mortgage is obtained to purchase commercial real estate, all borrowers agree to the terms and conditions of the loan together. When this happens, all parties hold equal liability to the property.

For example, if one of the tenants in common does not make payments as agreed, the other parties could be held responsible or have assets seized. There are also no automatic survivorship rights in a TIC, which could be concerning for some property owners. Other factors to remember include that any tenant can cause the forced sale of the real estate property at any time.

Tenancy in Common Tax Implications

With the TIC structure, there are some factors to consider when it comes to taxation. Most of the time, the TIC receives a single tax bill. This bill is then divided based on the amount of commercial real estate each party owns. This requirement is often outlined in the agreement that all parties agree to.

There could be some local and state laws that play a role in this, but the tenants make their own decision about how this payment is structured.

It is also important to note that each TIC will have a liability in the tax bill. For example, if one of the parties defaults on their payment because they filed for bankruptcy, the other tenants must pay that bill.

How to End a Tenancy in Common Agreement?

In some situations, it may be necessary to dissolve the tenancy in common. One member of the TIC can buy out the other members. This would lead to the dissolving of the TIC. It is done in a joint agreement.

Sometimes the parties cannot agree on the dissolving of the property. This may lead to a breaking up of the ownership in a court order and legal proceeding.

Wrapping Things Up

In many situations, the use of TIC is sensible and beneficial, creating an opportunity for property owners to achieve the purchase and ownership of commercial real estate property in a meaningful manner. When considering this type of structure, investors must consider the drawbacks, including the shared liability in tax and mortgage liens and the process for dissolving them. Without a doubt, TIC is not uncommon and is readily used in various scenarios as a viable solution for ownership.

 

 

Source: What is Tenancy in Common in Commercial Real Estate?

https://www.creconsult.net/market-trends/what-is-tenancy-in-common-in-commercial-real-estate/

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Naperville Set To Approve Affordable Housing Incentives

Mayor Steve Chirico (Facebook/Mayor Steve Chirico, Illustration by The Real Deal with Getty)

A Chicago suburb that has been criticized for not having enough affordable housing took a step toward addressing the issue and resolving years of haggling over how to do so.

The Naperville City Council last week passed an ordinance that would create a program that could coax developers into incorporating affordable units in residential developments, the Daily Herald reported. The program, which passed in a unanimous vote, will offer a variety of incentives to developers, depending on how much affordable housing they propose.

The suburb, one of Chicago’s most populated, has been working on expanding its affordable housing stock through new development since 2018, which is when the Illinois Housing Development Authority told the city that only 7.5 percent of Naperville’s dwellings qualified as affordable, less than the 10 percent required for a community to be in compliance with the Affordable Housing Planning and Appeal Act.

That law, passed by the state legislature in 2003, gives developers a route to appeal local government decisions that block projects including affordable housing in towns that aren’t meeting the threshold and receive a green light to build through that route. It has similarities to the builder’s remedy regulations in California that was mostly unused until recently, when developers began pushing projects through an alternative path to standard local government approvals.

Over the summer, the planning and zoning commission in Naperville unanimously voted against a voluntary three-tiered program that would have given developers bonuses for including affordable housing in new projects, such as extra unit density and floor-area ratios. The political body’s main problem? The public wouldn’t have had the opportunity to weigh in on proposed developments.

“The public should not be precluded from being involved in determining how, where and whether development proceeds,” Planning and Zoning Commission Chair Bruce Hanson said at the time. “Government should not operate that way.”

The ordinance won’t apply to single-family projects or duplexes. Some of the incentives developers can choose from include reduced yard setback requirements and allowances for taller buildings. Depending on how much affordable housing a developer includes, they could theoretically be granted more than one incentive.

“This is a historic night for Naperville,” Councilman Ian Holzhauer said at the meeting. “We’re envisioning an inclusive future where people who work in Naperville can afford to live in Naperville.”

The incentive program has been reviewed by the local Human Rights and Fair Housing Commission and the Planning and Zoning Commission. The ordinance is set for final approval at an upcoming meeting.

 

Source: Naperville Set To Approve Affordable Housing Incentives

https://www.creconsult.net/market-trends/naperville-set-to-approve-affordable-housing-incentives/

Off-Market Multifamily Sellers Are Leaving A Ton Of Money On The Table

Off-Market Multifamily Sellers Are Leaving A Ton Of Money On The Table

Marketing a property can increase the sale price by up to 23%, which runs counter to the idea that off-market deals can achieve higher values because a buyer will be more aggressive to seal a trade.

The perception is when a seller has one buyer vying for an asset, that buyer is more aggressive and willing to pay a premium because they don’t want the seller to get into a bidding war for the property. Our research found the opposite.

This is a sign it is in the best interests of owners to undergo a marketing campaign for their properties. Growing allocations from institutional investors toward real estate are still driving a sizable pool of investors into bidding for multifamily assets, and a full campaign is what drives the premiums.

The job of a broker to create a competitive environment on behalf of the seller. Putting a building on the market determines the strongest buyer.

That may not be necessarily based on price alone. If one buyer has a higher-priced offer but weak financial backing, versus a buyer with a stronger track record, taking a lower offer is the way to go. It’s our job to give the seller those options and we do that by marketing properties and generating the highest number of qualified offers possible.

There are numerous case studies where a seller received an off-market bid, put it on the market, and the off-market buyer still bought the asset but at a higher price.

 

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eXp Commercial Chicago Multifamily Brokerage focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.

We don’t just market properties; we make a market for each property we represent. Each offering is thoroughly underwritten, aggressively priced, and accompanied by loan quotes to expedite the sales process. We leverage our broad national marketing platform syndicating to the top CRE Listing Sites for maximum exposure combined with an orchestrated competitive bidding process that yields higher sales prices for your property.

 

https://www.creconsult.net/market-trends/off-market-multifamily-sellers-are-leaving-a-ton-of-money-on-the-table/