A Guide to Investing in Commercial Real Estate in the USA
The recovery of the commercial real estate sector in the US although slow, has been marked by improved fundamentals, asset pricing, capital availability and transactions. Â In reality, REITS continue to outperform others, mainly on account of easy admittance to capital markets and higher liquidity. There is also a growing interest among investors from Asian, European and emerging markets in a quest for growth along with diversification of investments.
A Chinese real estate developer bought a huge property belonging to the General Motors Building in Manhattan in May 2013. The GM building is a massive 50-story structure made up of white marble and is one of the most important office towers in the US. Xin Zhang, chief executive officer of Soho China, who bought the property, also has a major stake in the Park Avenue Plaza. Other Chinese investors are buying notable commercial real estate properties across New York.
The buying spree is not just restricted to the city of New York or investors from China. Investors all over from Asia are purchasing premiere commercial real estate properties in the US, according to Christopher Ludeman, an eminent member of Global Capital Markets, which handled the sale of the GM building.
Ludeman says that a family from Indonesia recently bought Los Angeles- based US Bank Building for a whopping $ 385 million. He adds that a nearby property in downtown Los Angeles was bought by the Korean Air Group, where in theyâ€™ll construct a massive headquarters facility.
Commercial real estate market in the US is hot
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From Illinois to Hawaii to Florida, the market seems to be on fire. Canada heads the list when it comes to buying commercial real estate in the US. However, other Asian nations including China and Singapore are not far behind. Foreign investment in commercial real estate in the US, especially from Asian countries touched a staggering $ 7 billion so far in 2013, according to Dan Fasulo, managing director of Real Capital Analytics. He adds that the figure in 2012 reached $ 4.3 billion.
As of mid-June, Singapore emerged as the top Asian nation to invest in the US with the investment amount touching $ 1.9 billion, while China occupied the second spot with investments worth $ 1.5 billion, as reported by Real Capital.
Ludeman says that the Chinese are very cautious investors who carry out an extensive research, and the United States appear pretty good. He adds that foreign investors love the US on account of the countryâ€™s rule of law, the transparency linked with real estate information and the fact that the country still has the strongest economies in the world.
The Top US Cities for Commercial Real Estate investment
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New York-based privately held commercial real estate services company, Cushman & Wakefield, recently published a report entitled â€śWinning in Growth Cities which listed the best cities for commercial real estate investment. This list was based on yields, investment volumes, market activity patterns, sources of international capital and drivers of the success of each city.
The report states that the performance of the global property market was outstanding in 2012. The overall volume as of June 2013 went up by 16.7% to stand at $ 649 billion. C&W named New York as the best city for commercial real estate investment. London took the second spot while Los Angles was ranked third.
The biggest gainers, according to the report, were Austin, Las Vegas Tampa and Montreal. Around 15 cities in North America featured on the top 25 fastest-growing major markets. The other cities in the US besides New York and Las Vegas that featured in the list for commercial real estate investment were as follows (in order of merit):
- San Francisco
- Washington DC
In addition, the office sector pulled in the maximum attention with 44.8% of investments in the top cities being in office properties. Another interesting aspect is that Phoenix which is ranked lower than Washington DC in terms of sales volume is on an upswing compared to the latter. The annual effective rent growth at 2.6% and an occupancy rate of 93.5% (as on September 2013) keeps growing in the region. More foreign capital is flowing into theâ€ť Valley of The Sunâ€ť, especially from Canadian investors.
The Texas cities mentioned in the list-Houston and Dallas-are enjoying vacancy rates in single digits with additional units coming up. However, the annual effective rent growth has seen a decline in the last 12 months, with the figures for Dallas standing at 3.64% and 5.21% for Houston. However, these numbers are still good as the cities are both pulling in people and jobs, which have led to increased levels of CRE investment.
In its conclusion, C&R stated that cities in the US are great places for commercial real estate investment, with New York emerging as a top favorite destination.
Benefits of investing in the US market
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The commercial real estate market in the US is on an upswing with every passing day. Investing in real estate has become a common investment option at present. Many investors are heavily investing in the US market, New York in particular, with the improvement in the economy.
Here are some benefits associated to making an investment in commercial real estate:
- Leverage: Â This is one of the prime benefits of investing in commercial real estate. It permits you to obtain a relatively higher return on the investment you make. By the usage of leverage on your transactions related to real estate, youâ€™ll have a positive effect on your financial records.
- Appreciation: The improvement in the value of a property with the passage of time, as a consequence of supply, demand, inflation, capital improvements or other determinants is referred to as appreciation. There are various investors who make investments in real estate on account of diverse reasons. While analyzing the advantages of buying or renting a property, many investors opt to buy because of the only reason that it can enhance their net profit due to appreciation of the property.
- Tax benefits: Another great benefit of investing in commercial real estate in the US is tax benefits. You can have many tax benefits if you own a property here. All repair interest, Homeowners Association (HOA) dues involved are tax deductible.
- Capital Growth: The value of a property all over the US is increasing at a much rapid pace due to high demand. By making an investment in real estate, you can enjoy the benefit of a stable capital growth and earn a substantial income each month.
- Accumulate substantial equity via leverage: An important benefit of investing in commercial real estate is the scope of placing debt on your asset which can be several times the value of the original equity. This permits you to purchase more assets with less money and considerably augment your equity as you pay your loans.
Some essential tips
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While making an attempt to secure a lucrative commercial real estate deal, itâ€™s important to observe the following:
- Devise a Plan
Casually analyzing the available industrial property inventory will not assist you in securing the best deal. Similar to any other crucial investment, itâ€™s absolutely essential to devise a solid plan before commencing on the process. Create a blueprint of various vital determinants as part of your comprehensive course of action.
Some of these include:
- Development possibilities
- Lot Size
Taking these factors into consideration (and others) will guarantee that you make a sound and strong investment decision.
- Get to open houses
You must have heard the saying, â€ślocation locationâ€ť attached to commercial real estate. This adage holds true while looking for a commercial property too. A superior way to find the apt location is to have a look at open houses in the locations you may be interested in. By doing this, you may be able to have a firsthand account of the things you like as well as despise, which will aid in making the decision making process an easy one.
- Carry out extensive research
You may come across a commercial real estate property which may have everything desirableâ€¦..however, is it a solid deal? Make it a point to examine if the rent on the chosen property is beneficial and justifiable, or whether you require carrying out some more negotiation to reach the best price. Besides, always keep a close watch on whether anything has to be updated or repaired within the property so that you may appeal for it to be managed prior to putting in your signature on the dotted line.
- Hire a professional lease group
With respect to securing a deal, an excellent way to guarantee that you get a worthwhile lease on your commercial real estate property is to look for a professional and reputed lease team. Reputation for superior lease options combined with industry experience can have a huge impact on your leasing decision.
- Tap into all the possible available resources
A great advantage of looking for commercial real estate in todayâ€™s world is that there are countless resources to see to it that you are well-informed of the present marketplace. Make proper use of them. Use the web and read industry magazines which showcase inventory besides working with a professional commercial real estate team.
The Downside of Commercial Real Estate Investment
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Now letâ€™s have a look at the pitfalls of commercial real estate investment.
These are as follows:
- Time commitment:Â If you are the owner of a commercial property with six tenants or just a few, you need to find more time for the management of the building compared to a residential investment. With a commercial property, you are dealing with many leases, more maintenance issues, annual CAM (Common Area Maintenance) and concerns of public safety. In short, you have a lot to manage which will require plenty of time.
- Professional assistance required: The chances of handling a commercial property is that youâ€™ll not be able to deal with maintenance issues on your own. This is why you need to take professional assistance with repairs and emergencies. This is of course an added expense and hence has to be factored in while assessing the price to be paid for a commercial real estate investment. Â Property management firms charge around 5 to 10% of the rent revenues for this service including lease administration.
- Huge initial investment: Investing in a commercial property normally requires a greater capital compared to residential properties, which can be tough for some. After acquiring such a property youâ€™ll have to meet large capital expenditures, which includes repairs, maintenance and additional costs. With more tenants, there is greater number of facilities to be maintained, which results in increasing costs. However, you need to ensure that the gains in revenue exceed the gains in costs.
- Risks of recession: Another major drawback associated to commercial real estate is a fall in the economy. During a recession, people lose jobs and businesses have to bear the brunt. In such a case, your investment may generate a meager income or nothing at all. Capital reserves can assist you combat such economic catastrophe.
Bottom-line: The US so far has been the most preferred choice for investment opportunities for investors all over the world as they feel that the country offers the best opportunity for the growth of their commercial real estate investments. The economy of the country seems to be strong with more and more foreign investors parking their cash and investment company managers tipping the US to be one of the best-performing nations.