The cheap dollar has many foreign investors looking for quality investments within the United States. Unfortunately, the stock and bond market are suffering from a fall out in consumer spending. This leaves commercial real estate as the best alternative, especially considering the record amount of cash being held by many corporations. This article will take a look at the different commercial real estate opportunities available to these investors.
Why Commercial Real Estate?
Commercial real estate is a very versatile investment that can be customized for specific return objectives and risk tolerances fairly easily. It can be fine tuned to provide tax write-offs, generate strong cash flows, or create a large future payout upon sale. Many foreign investors in particular are beginning to acquire commercial properties in the U.S. in what promises to be a trend that will continue for several years.
Lower Federal Reserve interest rates has also not only enhanced the value of foreign currencies but also lowered the cost of commercial real estate loans. The downside is that the credit crisis has forced many lenders to require a greater equity stake in the deal from investors and therefore less leverage through debt financing. In the end, many investors insist that the depreciation of the dollar has greatly outpaced the loss of leverage through increased requirements.
Large investors are usually drawn to so-called core investments that tend to appeal to long-term, passive institutional investors seeking a secure return generated from the property’s cash flow. These projects include office buildings with long-term leases to tenants with strong credit and are typically located in major urban markets. The internal rates of return (IRR) for these investments are typically below 10 percent, but they still offer an attractive premium to other asset classes like stocks and bonds.
This strategy is comparable to purchasing shares of a blue chip company like IBM that offers a steady dividend but doesn’t do much in terms of equity appreciation over time.
Smaller investors looking to take on a bit more risk typically look for opportunistic investments. These are opportunities that typically involve adding value to a property to benefit from a change in marketing, operating, leasing strategy, or (most popularly) a new capital structure. These projects often take place in recovering markets or secondary markets and may offer some re-leasing risk when existing rents are below market levels.
These deals often result in an IRR that approaches 15% using moderate leverage. The increased risks associated with these opportunities can be minimized by investing with experienced local operators that can closely manage the asset and make sure everything is running as it should. It is also worth noting that the majority of the profit from these deals takes place when equity is sold through a property sale or refinancing.
This strategy is comparable to purchasing a technology stock with no steady dividend but a large potential payout in the form of equity appreciation when they develop and market their product.
Foreign investors continue to enter the U.S. market thanks to the low dollar value and commercial real estate is quickly becoming one of the hottest markets for these investments. The trend will only increase as credit restrictions begin to ease, so U.S. investors wishing to pre-empt the move may want to look at investing now ahead of the demand!