Article 2 of 5: Real Estate As An Investment Option
This is the second in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Let’s start by exploring various sectors of Commercial Real Estate (CRE).
The heart of every major city is the Central Business District, which is the standard for the “core” sectors of Office, Industrial, Multi-Family, and Retail. These buildings are typically the most expensive and are owned by large, institutional portfolios, i.e., insurance companies or pension funds. Satellite sectors include lodging, single-family rentals, self-storage, data centers & cell towers and even timber.
Every sector is then analyzed by geography and demographics.
Domestically, the most valuable markets are the “Gateway Cities” of Boston, New York, Washington, D.C., Miami, Seattle, San Francisco & Los Angeles. Industrial warehouses are more valuable closer to the ports of Houston, Savannah, and Long Beach, CA. CRE gets more affordable as we widen out to Secondary and Tertiary Markets. Demand for apartments, for example, is greater near universities, military bases, hospitals, or other major employers.
Every geographic center is then divided by “Sub-Markets”, which might be identified by average household income or education, proximity to transportation, or other magnets like schools and shopping. There is an expression that All Real Estate is Local, which speaks to the need for knowledgeable community members when evaluating the merits of owning a particular property.
Another prime determinant of CRE value is property quality.
This spectrum is distinguished by Core, Core Plus, Value-Add, and Distressed. Major metrics in determining a building’s status income maintenance, existing leases, and design characteristics. Beyond the outward appearances and heating, plumbing, and ventilation systems, appraisers evaluate tenant happiness and whether a property is overdue for a renovation. The greater the need for capital improvements, the value of property falls farther down this spectrum.
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As you learn more, it becomes readily apparent that investors need to rely on experts to determine the best buildings for any portfolio. Better understand how to evaluate some choices in our third installment, “Getting Real Estate Exposure through Public Markets”