It’s time to invest in U.S. commercial property

By Suzanne Sharma | February 7, 2013 | Last updated on February 7, 2013
3 min read

America’s commercial real estate market is headed for several promising years, predicts Ian Goltra, portfolio manager, Forward Management.

“If we continue to see modest job growth and don’t double dip into another recession, our outlook is we have several quarters of continuing positive net absorption (how much space is leased versus how much is vacated),” he says. “This means we’re leasing more space than is vacated.”

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Also, there is very little new supply slated for the next few years, adds Goltra, who spoke at the New York Consultants Conference, hosted by the Investment Management Consultants Association (IMCA). So investors may want to get in now, before all the good deals are gone.

In fact, through 2016, Green Street Advisors, Inc. expects the profitability of owning U.S. commercial real estate to grow 3% to 3.5% annually, says Goltra.

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Apartments buildings in the heart of major U.S. cities are providing solid returns. This is thanks to the 24- to 34-year-old demographic entering the workforce, the majority of whom prefer to rent.

“They want to live and work downtown, not in the suburbs,” he says. “So the proposition of apartment owners is strong, considering the cost of occupancy in renting versus buying sways in the direction of renting.”

San Francisco, New York and Washington are experiencing demand from local workers who want personal units, as well as companies who need to lease commercial space. This is driving up rents, overall.

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However, there are still some concerns.

In New York, for instance, financial services firms aren’t hiring as rapidly as before, which may result in some rental vacancies. But on the upside, technology companies are experiencing growth, creating demand for rental space. This has been healthy for building owners, says Goltra.

And in Washington, government-related contractors aren’t as aggressive in taking up space, so there are still pockets of vacant areas.

Meanwhile, retail property has exceeded expectations.

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“People thought the diminished consumer as a result of the crisis wasn’t shopping as often,” says Goltra. “But regional malls have held up much better than folks had expected. The lesson is: never bet against the American consumer.”

For individual investors, many of whom can’t afford to purchase a commercial building, public Real Estate Investment Trusts (REITs) offer opportunities. These funds have growth in dividends, lower fees, and daily liquidity.

“These are long term investments,” he says. “They won’t grow 30% a year, but if you can make high single-digit, low double-digit returns consistently, it’s healthy.”

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But for the last three years, REIT returns have been especially strong.

“Our Forward Real Estate long-short fund was up 23% last year,” says Goltra. “Our International fund was up over 50% in 2012.”

However, he warns the reason for such high returns was that the country was coming out of a crisis. “It’s not necessarily a fair reflection of what they should expect in coming years.”

Canadian investors may want to consider the International fund, he adds, because it has significant assets in Canada.

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And don’t be afraid of rising interest rates when it comes to investing in REITs, he says. Some investors consider REITs a fixed-income product, so when rates rise, they balk, thinking there are better income alternatives elsewhere.

But that’s not the case because rents typically rise in periods of elevated inflation, which is presumable what’s driving interest rates higher.

“The historical equation for real estate is you want to own it in times of high inflation because it’s a hard asset. You should see healthy rental growth. The same growth that’s going to drive dividends will also drive the value of buildings higher.”

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The strongest risk to REITs, as with many other funds, is a double dip recession.

“If we can’t deal with the debt ceiling and Washington has a bout of indigestion, we’re going to have a problem,” says Goltra.

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Suzanne Sharma