4 methods to take a look at actual property investments
Many people may think that the only way to invest in real estate is to buy and rent a single family home. However, real estate investments are more than just becoming a landlord. Commercial real estate is another way for investors to diversify their portfolios away from stocks and bonds with real estate. And unlike a landlord, where you have to actively manage the property and your tenants, investing in commercial real estate makes you a passive investor. The sponsor behind the project takes care of the day-to-day management of the property hands off.
Commercial real estate is also much more than apartment buildings and office buildings. Asset classes such as self-storage, retail and senior housing offer investors unique investment opportunities. But like any product, commercial real estate is constantly evolving to meet the demands of the market. Four asset classes – build-to-rent, micro-units, student housing and e-commerce real estate – offer new opportunities for investors, especially in today’s economy.
The US Census Bureau estimates that 65% of Americans under the age of 35 currently rent. While 92% of Millennials think home ownership is a good investment, 48% of young adults say they have to delay home buying because of their student loans. At the same time, potential mass migration from COVID-19 – either through a desire to get out of crowded cities and find more space, or for economic reasons for more affordable housing – could mean that soon millions of young families will be looking for a new way of life.
A new type of multi-family home known as Build-to-Rent (BTR) could potentially meet these housing needs and create valuable opportunities for investors.
Build-to-Rent (BTR) takes the best aspects of single family home rental – courtyards, driveways, neighborhood feel, etc – and enhances the rental experience by developing all homes in a professionally managed community. These BTR properties are similar to traditional residential areas with great community facilities – swimming pools, tennis courts, dog parks – but without the HOA cost. Or a mortgage.
For investors, the BTR market has proven its ability to “Market Rate
Rewards ”versus competing Class A multi-family properties. CNBC reported,“… rents for
Single-family homes are now growing rapidly at 4.5% per year, compared to a 3% rental growth for apartment buildings. There is also much less revenue from single-family homes
The rental market is much less volatile than the home sales market. “
The downside of BTRs, which give tenants more space, are micro-units “a purpose-built, typically urban, small studio or bedroom with an efficient design that appears larger than it is, ranging from just 280 square feet to 450 square feet. “
Micro-units are perfect for tenants who want to live in urban cores, but cannot afford the high rental prices in subways like NYC or San Francisco without roommates. A micro-unit costs about 20-30% less than a traditional studio or bedroom, and the building often relies heavily on amenities such as a shared “living room” with a big screen TV, a large, reservable gourmet kitchen that is shared, work areas, etc., to compensate for the smaller units.
For investors, micro units can offer the highest rent per square foot of an apartment building. Although they can cost more to build and operate, the premium is
The rent achieved per square foot more than makes up for the additional costs that can result
higher distributions for investors.
At the start of the pandemic, the student housing sector received several severe blows. As universities across the country closed and students were sent home, vacancies for student housing skyrocketed. As this happened, college and university revenues fell, and some smaller colleges began to fail. However, this fall, many large, world-class conference schools opened offering either in-person tuition or a mix of online and face-to-face tuition. Many of these larger schools have taken steps to actually increase their student population. Every Ivy League school with the exception of Princeton University prepared for deferrals and reduced enrollments, and increased their acceptance rate in the fall.
Student housing, like any market, must balance the forces of supply (number of beds available) and demand (number of students looking for beds). Many students who have been stranded by the closure of their smaller schools want to move to larger facilities. Recessions have also often led to an increase in enrollments. In addition, much of the campus has decreased its on-campus housing capacity and the demand for off-campus housing near these world-class schools has increased.
The long-term profitability of a student housing market depends to a large extent on a consistent,
sustained growth in the student population it serves. For investors, the dorm has consistently shown that it is resilient and has proven to be recession-resistant in 2008. Looking to the future, the school year 2021/2022 is likely to show sustained growth in enrollments due to the persistently high unemployment and the 2020/21 deferral. If we end the pandemic, the most desirable and capitalized universities will continue to leverage their competitive advantage to attract the best students in the country in record numbers, which in turn will fuel their student housing markets.
E-commerce real estate
While personal retail sales, aside from major key stores like grocery stores, slowed significantly during the pandemic, the decade-long trend of growth in online shopping has only accelerated. According to McKinsey Consulting, consumer e-commerce sales have increased 15-30% in most categories. However, the growth of e-commerce doesn’t mean the end of physical buildings. It just means that the way we use real estate may change.
According to Chris Caton, Head of Global Strategy & Analytics at Prologis, the world’s largest owner, operator and developer of logistics real estate, “E-fulfillment is one of the most intensive uses of logistics real estate” and “Prologis values these customers. For every billion US dollars in sales is 1 , 2 million square feet of sales space required E-commerce requires three times as much space as traditional throughput distributions. ”
Investing in temperature-controlled warehousing, crucial for shipping perishable goods
like groceries, rose from $ 560 million in 2016 to $ 963 million in 2018. The industry
Before COVID, the stand was 214 million square feet, but a 2019 CBRE report argued so
The demand for cold rooms could increase by 50% by 2024.
And e-commerce is only possible with data centers, another form of industrial property. Forbes reported that data centers were the only industry segment among REITs that “saw positive growth of 8.8% in the first quarter of 2020”. For investors, the increased demand for distribution space on the last mile is likely to continue for years, especially in growing metropolitan areas. With most stabilized industrial properties trading at prices above replacement costs, fundamental development opportunities could arise in locations where demand seems to outperform supply.
No two real estate investment opportunities are alike. Each project has its own business plan, market assumptions, and potential for success (or underperformance). However, these four asset classes offer investors even more choices when investing in commercial real estate. And with access comes the opportunity. On a marketplace like CrowdStreet’s, investors can compare dozens of individual deals (or real estate funds) to find the right one to add to their portfolio.
CrowdStreet is a content partner of Passive Income MD.
This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and is produced for informational purposes only. CrowdStreet is not a registered broker-dealer or investment advisor. Nothing in this document should be construed as an offer, recommendation or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended as advice to be used by investors or prospective investors, and does not take into account the investment objectives, financial situation or needs of any investor. Every investment involves risk, including the possible loss of money you invest, and past performance is not a guarantee of future performance. All investors should, in consultation with a professional advisor of their choice, consider such factors in determining whether an investment is appropriate.