Investing in Commercial Real Estate
Investing in commercial real estate has long been considered a viable investment vehicle for those investors looking to earn a sizable return on their money. U.S. commercial real estate prices fluctuate considerably both over time and cross sectionally. Understanding these fluctuations and what drives them is an important study in commercial real estate as it represents a substantial portion of U.S. wealth (in 2007, Standard and Poor’s estimated the value of all U.S. commercial real estate to be 5.3 trillion dollars).
From an asset pricing perspective, the price of a commercial property represents the value of the property’s future rents. This fundamental relationship implies that the fluctuations in commercial real estate prices should reflect the variation in future rents, future discount rates, or both. The value of commercial real estate also differs from residential because the income that a piece of commercial real estate produces is directly related to its usable square footage. This isn’t always the case with residential.
Investing in Commercial Real Estate also helps to provide the investor with diversity of risk. For example, if you own an apartment building with twenty units, and you lose one of the tenants, then you only lose one-twentieth of your income, rather than your entire income associated with a single family owned residential property. In addition, the cash flow is often greater with commercial real estate. With yield often higher then residential on a per square foot basis, multi-unit properties hold a higher value than single family owned dwellings.
Commercial real estate has also been proven to provide advantages over common stock when analyzing the dynamics of expected returns and the growth in cash returns. Rents, as opposed to cash dividends, more accurately reflect the
Contact the specialists at HML Investments today for further information regarding commercial real estate loans.