Experienced investors understand that every market has its risks and rewards, even in extraordinary times like we've seen over the last few years. Vetted investors also know there is always a deal to be found if you understand the market and are willing to adjust to the conditions. Below are a couple CRE investing tips to bring to the forefront and a review of the current commercial landscape.
Networking
Don't be afraid to network. It is not uncommon for commercial properties to change hands through off-market deals. There aren't good statistical records that translate into direct sale correlations, but we can all attest to the power of networking in our business and personal life. Networking is where you uncover opportunities, partnerships and best practices.
Develop relationships with agents that specialize in the type of CRE in which you invest
Make your presence known to other investors
Trace leads by calling property owners where you see potential value add
1031 Exchanges
1031 exchanges allow CRE owners to defer federal and state capital gains and recaptured depreciation triggered on the sale of their holdings given real property of equal or greater value is acquired within 180 calendar days of the closing.
Commercial properties may be subject to depreciation on both the land and the building. This appreciation may result in a gain when the sale is completed. Both the recaptured depreciation and the gain can trigger a tax liability, which can be deferred through a 1031 commercial property exchange.
Eligible 1031 Commercial Properties
Apartments
Convenience stores and gas stations
Golf courses and practice ranges
Hotels and motels
Marinas
Nursing homes
Office Buildings
Parking garages and lots
Self storage units
Shopping centers and strip malls
Warehouses
The Current CRE Climate
The commercial landscape is evolving and there are more changes ahead with macroeconomic factors influencing the market. JP Morgan recently reported their 2024 commercial real estate midyear outlook:
Office vacancies rise: The national office vacancy rate rose to 19.6% in Q4 2023, breaking the previous record of 19.3%. The 0.3% surge is also the largest quarterly increase since Q1 2021, according to Moody’s Analytics CRE. While offices aren’t obsolete, it’s unclear how far demand will drop and how high vacancies will rise. “However, most desirable office properties in the most active locations will likely outperform,” said Victor Calanog, Global Head of Research and Strategy, Real Estate Private Markets at Manulife Investment Management. “This pattern will likely persist over the next few years, which puts a greater onus on commercial real estate investors to evaluate risks and opportunities asset by asset, deal by deal.”
Multifamily successful, but some oversupply: Apartments and multifamily properties remain strong overall. There’s consistently a need for affordable and workforce housing. B and C class properties saw a 4.6% vacancy rate in 2023, according to Moody’s Analytics CRE. Luxury properties’ vacancy rate was notably higher at 6.5%. As a result, many property managers are making concessions, primarily in the Sun Belt where obtaining building permits is easier, making overbuilding easier, too.
Smaller, smarter retail: Retail continues to perform well in 2024, especially grocery-anchored neighborhood shopping centers in densely populated areas. In line with this trend, many major big-box retailers are opening smaller concept stores. “The move toward smaller concept stores is a key part of retail’s evolution,” Calanog said. “The best performing retail properties will have owners and operators who are flexible and willing to adapt to what their most important tenants need.”
Industrial properties remain strong: Brick-and-mortar retail is thriving, and e-commerce sales have grown to 15.6% of retail sales, fueling demand for industrial properties. The growing trend of nearshoring along with the need to replace older, outdated industrial buildings could continue to drive construction and demand in the second half of 2024 and beyond.
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Quick decisions with in-house underwriting
Certainty to close
Availability of real estate & banking experts to listen & stay connected
Flexible financing options for flips, refis & income producing properties
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