Rebuilding Retirement Through Commercial Real Estate Investment
As the baby boomer generation ages into retirement, boomers are making massive changes to the American healthcare system, workforce and culture. They are buying up commercial property throughout the country at a heightened rate. Why?
Several converging trends have turned commercial real estate into an attractive asset class for investors. First, the Great Recession decimated boomer’s retirement accounts. Second, economies across the nation are trending upward, outpacing nearly every other state in the nation. And third, the real estate market is heating up along with the economy, providing a safe and predictable cash flow for those seeking to recapture losses.
SCRAMBLED NEST EGGS
In the post-recession world, baby boomers are fearful about their ability to retire with enough savings, according to a report from the U.S. Congress Joint Economic Committee. That committee found that 39 percent of those aged 55 to 64 are pessimistic about their retirement security. And it’s no wonder why: People in that age bracket lost 33 percent of their household net worth from 2007 to 2010.
For those looking to rebuild their retirement accounts, real estate investments are an attractive alternative.
“A lot of these baby boomers have had to reach out on the risk spectrum to achieve returns they experienced prior to 2008. They are no longer investing in bonds because the bond market cycle is now going in the opposite direction as well as the inevitable interest rate risk associated with them. Equities, Mutual Funds and ETFs were another area where they have been investing in Blue Chip stocks––chasing yields and expecting reasonable dividend,” says Adam Gatto, senior vice president of investments for Coldwell Banker Commercial Advisors.
As an alternative to those more traditional investment options, baby boomers are turning to commercial real estate as a viable asset class —particularly in secondary markets, which has a strong market and a thriving economy. “Baby boomers in primary markets are seeing increased valuations for investments in primary markets. These are increasing to the point that the fundamentals don’t make much investment sense,” says Gatto. “There’s been a quiet, yet significant, shift toward these secondary and tertiary markets, to identify those income producing properties that have less competitive bidding and attractive investment returns on capital.”
A HOT COMMODITY
The combination of investors looking for attractive opportunities and a strong, healthy economy has lit a fire under the nation’s commercial real estate market.
Another trend that has affected the commercial real estate market is a renewed interest in urban life. In the past few years, increased residential living has fostered a demand for more urban retail space.
“There’s been a shift, to some degree, with baby boomers, millenials and even empty nesters who want to be in more of an urban environment—whether that’s downtown or neighborhood environments which have multi-family developments going up to meet the demand of these young millenials and baby boomers who want to be in an urban environment,” says Robert Kofoed, senior associate of investment at Coldwell Banker Commercial Advisors.
Despite the fact that the commercial real estate climate is on the upswing, potential investors still need to approach the speculative market with some business savvy. Investors need to stay informed of the current business climate, both locally and nationally, in order to make sure their property is filled with lucrative tenants.
“In the case of retail, it’s ideal to have a combination of local businesses and national tenants, which are a driving factor of filling up a center and creating the synergy that you need. From an owner standpoint, it helps maximize occupancy, which translates into increased value within the investment,” Kofoed says.
The real estate market has demonstrated a surprising resilience in the years that have come and gone since the recession. The commercial real estate market has been performing above the norm and it doesn’t look like there’s anywhere to go but up.
10 TIPS FOR REAL ESTATE INVESTORS
1. Have A Detailed Game Plan. Make sure to address as many variables as possible. Questions about occupancy volume, projected earnings and tax rates should be answered before pulling the trigger on an investment opportunity.
2. Take Your Time. Don’t rush into anything. Like most long-term investments, it’s important to build a solid foundation before expecting a return.
3. Crunch The Numbers. Set a budget and stick to it. Establish a firm set of financial parameters that you can live with and make sure to stay within those parameters.
4. Inspect The Property. Develop an eagle eye when it comes to potential maintenance issues. Small cracks and leaks can lead to big financial liabilities later on.
5. Recognize The Neighborhood Culture. Investing in a property is essentially investing in a community. Get to know the values of the people that live, work and play in your property’s community.
6. Strive For Synergy Between National And Local Businesses. Recognize that national companies can bring in valuable traffic for local businesses. A good commercial property should strike a balance between national and local business.
7. Know A Good Tenant From A Bad One. Look for tenants who are passionate and motivated about their business. They’re the ones who will end up bringing in the customers.
8. Take Advantage Of The Information Age. There are a variety of resources available to potential investors in our age of information. These resources make it much easier to network and track down potential leads.
9. Be Involved In The Business World. Pay attention to commercial trends and use that information to court tenants who are on the cutting edge of commerce.
10. Have An Exit Strategy. Establish a contingency plan for unforeseen circumstances. A good exit strategy can help minimize loss if things turn sour.
As published in The Advisor 2015.