Whether you’re a seasoned investor or you’re thinking about investing in commercial real estate for the first time, it’s a complex market. There’s been a lot of doom and gloom in the news, and it has kept a lot of investors, both new and experienced, on the sidelines. But through it all, one old real estate adage holds true.
The best time to buy real estate is yesterday.
The second-best time is today.
It’s true. No matter the climate, there is no time like the present to invest in an appreciating asset, especially one as robust as commercial real estate. Here are a few reasons why now is the time to invest in commercial real estate, and why sitting on the sidelines and doing nothing may be the most costly decision you could make.
The Inflation Debate
Inflation topped out at a whopping 9.1% in June 2022. It declined to 6.4% in January of 2023 and fell further to 3% in June. Since then, it’s gone up again, reaching 3.7% in August — contrary to the government’s 2% target.
However, the key isn't just the overall inflation rate; it's how it affects our daily lives. While the headline inflation rate is 3.7% year-over-year, specific items have seen even steeper increases. Car insurance, for instance, surged by 19.1% as of August, personal care products by 7.3%, dining out by 6.5%, and even frozen vegetables by 14.7%.
And while inflation at 3.7% may feel low compared to recent years, some forecasts suggest that it could level out around 5% and remain there through 2025. Even the lower-end projections show inflation sitting at 2.3% at the end of 2025, still higher than the government’s goal of 2%.
In short, if you’re sitting on the sidelines waiting for inflation to come down to “normal” levels, you could be waiting awhile. So the question for investors today and for the next several years is not going to be whether or not to invest, but how to invest — and thrive — in an inflationary landscape.
The Best Hedge Against Inflation
Sitting on cash is no way to beat inflation. Parking your money in CDs or money markets isn’t a long-term strategy and comes with its own uncertainties and risks. The best way to hedge against inflation is to put your money to work.
Inflation doesn’t have to be a cost. It can be an opportunity. And the best long-term strategy to beat inflation is to invest in an appreciating asset.
Commercial real estate is king of these assets.
Commercial real estate, particularly multifamily, is a tangible, resilient asset. Most long-term commercial leases (office, retail, etc.) have some built-in escalation clauses, but unless that increase is tied to the Consumer Price Index, landlords may lose ground relative to rising inflation. Multifamily owners, however, generally have shorter leases that renew each year. This gives them the ability to increase their rents annually above and beyond the rate of inflation. This adaptability offers an edge, as it aligns more closely with changing economic conditions, ensuring landlords don't fall behind inflation trends.
As such, multifamily assets tend to perform well during periods of both moderate and high inflation.
Multifamily real estate investments offer cash flow, appreciation, depreciation, and mortgage reduction paid by the tenants. This, along with being the most resilient among CRE classes, makes multifamily an appealing investment in an economic climate like today’s.
But What About Interest Rates?
The combination of higher interest rates and rising property values makes it more difficult for investors and syndicators to find deals that will provide the returns their investors seek. And it’s likely that high interest rates are here to stay. That’s why it’s important to partner with a sponsor who has a history of conservative underwriting, leveraging fixed-rate debt to insulate them from future interest-rate hikes, and who has a track record of thriving through various economic cycles.
High interest rates do come with a bit of a silver lining for multifamily owners, though.
The average mortgage rate for 30-year fixed loans has risen to 8.16% as of October. At the current 30-year fixed rate, homeowners are paying roughly $748 each month for every $100,000 borrowed. This alone will prohibit tens of thousands of millennials from purchasing homes, keeping them in the apartment market for the foreseeable future and resulting in high demand for multifamily. Investors who are experienced and diligent enough to find and close the right deals can benefit massively from this demand.
Navigating today's tumultuous investment landscape, with rising interest rates and unpredictable inflation, might seem daunting. Yet, the enduring truth remains: real estate, especially multifamily, offers a reliable shield against these economic uncertainties. It's a resilient, appreciating asset that offers cash flow and tenant-paid mortgage reduction. Partnering with an experienced sponsor who puts foundational guidelines and principles in place to position themselves to thrive in any economic climate increases your likelihood of success.
So, rather than waiting for the “perfect time” to invest in commercial real estate, I encourage you to start today. Remember, sitting on the sidelines and doing nothing may be costing you more than you realize.
About the Author:
Darin Davis is a co-founder and principal at Presario Ventures, a private equity real estate firm focused on investing in commercial real estate assets on behalf of its investors. Presario Ventures is committed to identifying and managing sound real estate investments in multifamily properties. With a history of conservative underwriting and a focus on long-term strategies, Presario Ventures thrives in diverse economic conditions and has a track record that speaks for itself. To learn more about how to invest with Presario Ventures, visit info.presarioventures.com/bestever.
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.
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