Why Invest In Commercial Real Estate
Unlike most other asset classes, real estate allows the creation of near monopolistic operating conditions. Commercial real estate investments offer many attractive advantages such as long-term capital preservation, return enhancement, reduced overall risk for a portfolio of assets, generous leverage with less exposure than equities, and tax advantages.
In addition to potential capital appreciation, real estate can provide stable, predictable income potential. This income can act as a useful hedge against inflation in the longer term, since over time, rents tend to adjust to nominal price levels. Furthermore, commercial real estate has delivered highly competitive risk-adjusted long-term returns: over the past three decades, commercial real estate has delivered 8%+ average annualized returns, with observed volatility similar to that of bonds.
Real estate also offers some compelling diversification benefits for stock and bond investors. Commercial real estate returns have displayed low correlations with diversified bond portfolios, and less than perfect correlations with returns on stocks, acting as a useful source of portfolio diversification. Commercial real estate investments carry a greater unsystematic risk weight than systematic risk; for this reason, commercial real estate investments offer better opportunities to create alpha, or greater risk adjusted returns, than other asset classes.
Economic fundamentals are extremely favorable for commercial real estate investments. Interest rates are at historical lows, certain sectors of the market enjoy large unsatisfied demand, and there are little if any new products coming into the markets, and we know that when we come out of the deleveraging phase we will see significant inflation pressures.