Although the pandemic that shut down America back in 2020 is more or less in the rearview, its lingering effects continue to cast a long shadow across the national economy.
Among the most tangible aftershocks of Covid-19 include the threat of a national recession, record-high inflation, ongoing materials shortages and supply chain disruptions, and declining commercial real estate values, particularly in the office sector due to the continuing work-from-home trend.
These issues present many challenges for the more than $20 trillion dollar commercial real estate industry, yet real estate still remains at the forefront of investor interest for a number of reasons. Here are five of the main benefits of including commercial real estate in your client’s investment portfolios.
Why Your Clients Should Add Commercial Real Estate to Their Investment Portfolios
Despite the many issues associated with the macroeconomic factors mentioned above, commercial real estate still has a place in your client’s investment portfolios because of the many potential benefits it can provide. Among them:
- Portfolio Diversification. Real estate is a tangible asset that tends to behave much differently from public investments such as stocks and bonds. It's generally uncorrelated to broader movements in the stock markets, so diversifying your client’s investment mix to include commercial real estate may provide a buffer from bear market runs.
Portfolio diversification has a deeper and secondary meaning within commercial real estate investments. You can further diversify your clients’ investment portfolios by allocating capital across a range of commercial asset classes, property types, and geographical regions. Doing so can help spread out investment risk, create different risk profiles, and provide the potential for increased or at least steady returns if one market or asset type is underperforming.
- Passive Income. Commercial real estate investments have the ability to generate passive income through recurring rental payments. This income can provide a steady stream of cash flow from which you can reinvest a percentage back into your property, or use it to help meet other financial goals, such as paying down debt or boosting your savings. Owning multiple passive income streams can provide a buffer against lost income from a vacancy in one of your client’s rental properties. Commercial leases also tend to be inked for much longer terms than residential leases, which helps decrease investment risk, provided you have a tenant in your space.
- Potential for long-term appreciation. Capital appreciation can be one of the most lucrative aspects of investing in commercial real estate. Asset appreciation is a long-term play that requires a buy-and-hold strategy. Average commercial property appreciation in the U.S. is predicted to run anywhere from 3.3 to 5.7 percent, barring a national recession, but key factors such as location, asset type, demand, and the state of the national economy can heavily influence commercial property values.1 Asset appreciation also can provide a hedge against inflation while helping your clients grow their wealth over time.
- Tax benefits. There are many compelling tax benefits associated with direct property ownership. Common tax deductions for property owners include depreciation, mortgage interest, property taxes, and marketing/advertising/travel expenses. These deductions can reduce your taxable income and increase your annual cash flow.
The 1031 exchange provides another important tax advantage for commercial property owners. Investors with highly appreciated properties can sell them and defer any realized capital gains taxes by rolling the sale proceeds over into a like-kind replacement property. Your clients can complete 1031 exchanges to diversify their real estate holdings and trade up in asset valuation.
- Tangible asset. Unlike stocks or bonds, where you follow price movements on a computer screen, real estate is a physical asset that can be seen and touched. Owning an income-producing rental property can provide your clients with a sense of security and stability that’s not available with other types of intangible investments.
Putting it all Together
All told, there are nearly 20 million rental properties in the U.S. Just under three-quarters of those assets are owned by individual investors.2
The U.S. will likely continue to feel the effects of the pandemic for years to come. Regardless, there remain many compelling reasons why your clients should consider adding commercial real estate to their investment portfolios.
1 What is Capital Appreciation in Real Estate, https://www.jwbrealestatecapital.com/rental-property-valuations/
2 Investment Property Statistics and Tips, Bankrate, https://www.bankrate.com/mortgages/investment-property-statistics/