Welcome to the second of our two-part commercial real estate investing guide, written and produced in partnership with Crowdstreet, the world’s largest online real estate investing platform as measured by the number of deals done.
Part two will focus on where commercial real estate investors currently see the biggest opportunities. Not only that, but what they’re looking for from real estate deals this year, and how you can go about joining them.
Understanding investor sentiment is an important part of making good investment decisions, including when it comes to commercial real estate, a.k.a. CRE.
Knowing what other investors are thinking and feeling can help corroborate your own investment theses, or highlight areas where you stand apart from the crowd – meaning you could be onto a very big opportunity or exposed to a very big risk.
Partly thanks to a strong economic recovery and stock market in 2021, the commercial real estate market has started returning to normalcy, and investors are set to try and benefit as best they can.
According to Crowdstreet’s 2021 Investor Sentiment Survey, a little over half of investors had under 10% of their portfolio invested in commercial real estate last year.
But that’s set to change: 55% of surveyed investors expect to invest more in CRE this year compared to last, primarily at the expense of bonds which almost half of investors expect to put less into this year.
Suffice to say, there’s strong investor appetite for CRE deals in 2021: 96% of investors want to make at least one deal, while two-thirds intend to make as many as three deals.
What investors are looking for from CRE deals varies slightly, largely depending on how experienced they are, but they all have one thing in common: they’re all highly likely to use an online platform to invest in real estate in 2021.
Across the board, the most important factor for CRE investors was the “sponsor experience”, highlighting the importance of a reliable partner. A sponsor is the person or company responsible for finding attractive deals, buying the assets, and managing them on behalf of investors.
Naturally, investors want to generate positive returns, so business plans and “internal rate of return” (IRR) targets were also important factors. An IRR is a measure that tells an investor what annual rate of return an investment should generate, excluding external factors.
Environmental, social, and governance (ESG) factors are worth a mention too: they scored as the least important factor among CRE investors. But it appears to matter more to newer investors in the space: 8.2% of those with less than three years of experience think ESG considerations are very important, compared to 5.6% of investors with more than four years’ experience.
CRE investors are keen to take advantage of pre-pandemic trends and currently see the greatest value in markets likely to recover from the pandemic first.
The Southeast region of the US is far and away the most attractive place for CRE investments at present, with almost 40% of surveyed investors very likely to invest there. On the flip side, over 40% of investors plan to steer clear of the Tri-State area and New England.
Almost half the investors surveyed showed a preference for backing multifamily housing real estate projects. That makes sense: even post-pandemic, working from home is likely to be more of a mainstay than it had been before, and that’s created demand for bigger and better family homes.
The corollary to that is over 75% of investors plan to avoid the retail sub-sector and over half plan to avoid office-related investments. They’ve both suffered significantly as a result of the pandemic, and if investors are betting on a life away from offices, then real estate investments in offices and nearby retail locations may prove unwise.
Therein, however, could lie an opportunity: if most investors are negative on a sub-sector, valuations might look attractive as a result – as is the case in retail, hospitality, and offices. An investor with a sufficiently long time horizon, then, could take a contrarian approach and bargain hunt for deals.
To make commercial real estate investment decisions on your own, you’ll need to do your own research, legal work, and property management, as well as figuring out how much money you’re willing to invest on each deal.
Alternatively, to save yourself some time and effort, you can use an online real estate investing platform. You’ll still need to do your homework on each deal you want to participate in or subscribe to a privately managed account if you want to completely outsource the due diligence to a professional.
In any case, you’d want a platform with a proven track record of finding deals that have delivered strong risk-adjusted returns, and you’d probably want one that’s investor-friendly, allowing you to review, compare and pick deals that you like the most.
An “accredited investor” – with annual income over $200,000 (or a joint income of $300,000) or a net worth in excess of $1 million – typically allocates a quarter of their portfolio to real estate. That’s perhaps down to their accredited status giving them access to deals usually reserved for institutional investors – increasingly through accessible online platforms.
And there you have it. A guide to how investors are going to play commercial real estate opportunities this year, as well as the things they look for when making investment decisions.
Of course, when investing, your capital is at risk and isn’t guaranteed to make a profit: the value of your investments can go down as well as up.
This guide was produced in partnership with Crowdstreet, the world’s largest online real estate investment platform as measured by the number of deals done.
Crowdstreet’s online commercial real estate investing platform offers accredited investors access to funds and vehicles, tailored portfolios, and individual deals.
Check out Crowdstreet’s mini-website at finimize.com.
This article was, in part, written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. CrowdStreet is not a registered broker-dealer or investment adviser. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.