Commercial Real Estate is a Viable Investment
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News Release
For further information, contact:
Robert R. Tweed: President
Tweed Financial Services, Inc.
(626) 588-1520
Commercial Real Estate Is a Viable Investment for Today’s Investors
By Robert R. Tweed
Tweed Financial Services, Inc.
Real estate is still a very viable investment, but make it commercial real estate.
There are two broad sectors within the real estate market – residential and commercial. Residential is most widely covered by the media because it impacts the greatest number of people. But it is a distinctly different market than commercial real estate. While residential real estate markets have weakened throughout the U.S. with foreclosures on the increase,commercial markets appear to be remaining uniformly strong based on Fitch Ratings’ U.S. commercial mortgage-backed securities (CMBS) loan delinquency index. The U.S. CMBS delinquency index fell for the sixth straight month to 0.28% in July 2007.[*]
At Tweed Financial, we believe the commercial real estate market offers considerable opportunity for investors.[†]The reasons for our position relate directly to the following vacancy graphic.
One of the most important statistics in commercial real estate is vacancy rate. This is the ultimate determiner of supply and demand and helps drive rental rates and values. Based on statistics from Grubb & Ellis, after topping in 2003, vacancy rates nationwide have headed primarily lower.
Source: 2007 Global Real Estate Market Forecast for Institutional Investors, Nov. 9, 2006, Grubb & Ellis.
In the Orange County, CA area, the office vacancy rate has fallen below 7%, compared to 12% a year ago, according to newspaper reports. Declining vacancy rates give property managers the leverage to increase rents, improving return on investment.[‡]
Higher vacancy rates started showing up following the stock market’s collapse in 2000-2002, limiting appreciation in the commercial properties. As a result, commercial properties have not seen the runaway price increases that impacted residential values over the last five years.
The high vacancy rates gave investors fewer reasons to begin speculative construction projects in many metropolitan markets. Today, national construction levels still remain low by historical standards.
While improved vacancy rates will spur new construction, permitting, financing and construction will take time.New commercial space will be slow to come on line. Large scale projects initiated in 2007 are not expected to affect market conditions until 2009.
New commercial properties face demand for more modern amenities and much stiffer building requirements than existing facilities, which will keep the pressure on rental rates, benefiting existing properties.
Large institutions moved from net sellers of office and retail holdings during 2001-2003 to buyers and have been steadily increasing their acquisition of commercial properties.Institutions tend to be among the most risk-adverse investors, a clearly see potential in the market or they would not be investing. Aided by a weak dollar, foreign investors are also finding the U.S. commercial market particularly attractive.[§]
The slowdown in the housing market is having a positive impact on multifamily housing as potential first-time homebuyers opt to remain renters. In Los Angeles, the multifamily vacancy rate has dropped to 2% with professionally managed apartments gaining market share over smaller multi-family properties.
When you combine these factors with strong fundamentals - including continued job growth and a strong economy - commercial real estate can be a considerable promise as an investment. Just keep in mind that past performance is not indicative of future returns and all investments offer the potential for loss as well as gain.
When investing in commercial real estate make certain you are working with a financial advisor who understands the asset class and investment options, and read all disclosure documents thoroughly.
Robert “Rusty” Tweed is president of Tweed Financial Services, Inc. an independent, comprehensive financial planning and investment management firm. Tweed has educated thousands of investors on real estate investment and estate and trust issues through his popular seminar series since 1997. A Certified Estate Advisor, he is a member of the Tenants-in-Common Association and the National Association of Financial and Estate Planners.
Tweed Financial Services offices are located in San Marino and Beverly Hills, CA 800-526-1599.Checkout our website at: .
Securities Offered Through CapWest Securities, Inc. Member FINRA/SIPC/MSRB.
Tweed Financial Services, Inc. and CapWest Securities, Inc. are non-affiliated.
[*] “Second-quarter strength in commercial real estate bodes well for rest of year,” Frank Byrt, Financial Week, September 4, 2007
[†]As with any real estate investment there are various risks, including but not limited to: illiquidity, limited transferability, limits on management control of the property, variations in occupancy which may negatively impact cash flow, and loss of principal. Real estate values may fluctuate based on economic and environmental factors.
[‡] 2007 Real Estate Forecast, Southern California –Grubb & Ellis Company.
[§]“Commercial Real Estate’s Day in the Sun,” Weekly Market Monitor, TIAA-CREF Asset Management, February 12, 2007.
“Overseas, Manhattan Is Seen as a Bargain,” Michael Stoler, September 27, 2007, The New York Sun.