As an investor, one of your responsibilities is to evaluate the market before jumping into any investment. Market projections allow you to assess growth opportunities, and there’s a disciplined way to go about this process. Throughout this guide, we’ll be going over the commercial real estate asset class series, which involves storage facilities, multifamily properties, hospitality real estate, and industrial real estate, as well as alternative investments to diversify your financial assets.
If you’re new to investing, an “asset class” typically refers to a grouping of investments. These investments are usually subjected to similar laws, which is why they are grouped within the same asset class. A financial asset class refers to fixed-income investments, stocks, cash equivalents, futures, and alternative assets. But commercial real estate has its own set of assets depending on the type of property the investors purchase. This involves anything from multifamily buildings and offices to mixed-use properties and even land.
When you compare market fluctuations within an asset class, you’ll find that each class will share the same overall risk. The following guide will go over some of the questions you should ask when it comes to evaluating market projections for different asset classes. Meet your investment objectives by gaining some insight into different asset classes and asking the following questions before you invest.
1. Does migration affect self-storage demand?
Self-storage facilities are some of the most innovative solutions for growing families. They’re a great addition to your investment strategy considering the fact that they’re in relatively high demand. In the United States, there are over 50,000 self-storage facilities, which result in billions of square feet of rentable space.
As an investor, you’ll want to determine a specific course of action regarding the self-storage asset class by looking at migration patterns. You’re relying on renters to move around more frequently. When the pandemic hit, a phenomenon coined as the “Great Migration” drove older millennials away from urban areas. Relocation is one of the most common reasons why people use self-storage units. Baby Boomers also began downsizing their homes, increasing the need for storage. So, it’s safe to say that migration patterns greatly affect the demand for additional space in self-storage facilities. This market is expected to reach $64 billion by 2026.
2. Will multifamily supply peak in 2022?
Construction delays aren’t just affecting single-family homes; they’re also changing the market for multifamily investments in the U.S. The apartment industry has seen higher demand even with increasing rent. Building owners and multifamily property owners of spaces like townhouses, condominium buildings, apartments, and other properties are seeing bottom-line growth thanks to occupancy rates that are nearing pre-pandemic levels. Urban vacancies are actually expected to recover by the year’s end, which is why investors are still favoring the multifamily industry. Even though construction delays will likely drag on due to labor shortages and an increase in the pricing of materials, plenty of units will still be slated for completion before the end of the year. As an investor, there are benefits to sticking around for the long term.
3. Are travel restrictions still affecting hospitality real estate?
If there’s anything the pandemic has taught investors, it’s that you can’t just determine market projections based on past performance. The 2020 fiscal year certainly disrupted past market projections. But if you’re interested in different asset classes within commercial real estate, you might want to think twice about the hotel industry.
As far as asset allocation, investing in hotels may not be as profitable as short-term rental properties, for example. You’ll want to tread lightly when it comes to this sector as some areas have yet to fully reopen. Even then, one can’t predict whether travelers will turn up. And business travel has yet to return to pre-pandemic levels now that more of the workforce is operating remotely.
4. Should you use alternative investments to diversify your portfolio?
Those who are looking to diversify their portfolios may want to look beyond the traditional asset types and use alternative investments. You may find some additional incentives for this asset class while you evaluate market projections.
Alternative investments include properties like medical offices, land, student housing, and RV parks. These are, essentially, properties that don’t fall under the traditional commercial real estate asset types. While each of the other asset types has its potential advantages, these alternative investments could offer similar opportunities but with a lot less competition. It’s a great way to seek out positive cash flow, and it allows you to evaluate market projections in other markets that aren’t oversaturated.
5. What factors are currently influencing industrial real estate?
Industrial types of properties typically involve anything where products are stored, shipped, or even made. This can be construction, manufacturing, or repair. Apart from multifamily properties, industrial properties look the most promising if you’re interested in a new asset class.
There’s been a higher demand for warehouse space if you’re looking for some solid diversification. The higher demand can be attributed to the e-commerce industry taking off as more people avoid public retail spaces. In order to fulfill online deliveries, companies are seeking out more industrial real estate so they can continue their online marketplaces.
Because of supply chain issues, companies are increasing their warehouse footprints to accommodate additional inventory. Other companies are also looking for industrial space for their future business plans. Overall, it’s best to look at the inflation rate, the supply chain, and any companies that are driving the demand for industrial spaces like e-commerce, packaging, and manufacturing.
Whether you’re evaluating market projections for diversification or incentives, commercial real estate asset classes are worth your investment. Real estate has a long-standing record of stacking up against inflation. It doesn’t have the same volatility you’d find in financial markets either, which is why you should look into projections for each asset class with these questions in mind.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: good egg investments
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.