Commercial real estate is not just the flavor of the month for investors. Real estate has long been viewed as an attractive addition to portfolios. Some buyers like the fact that it is a tangible brick and mortar asset, or they view it as a diversification play and a hedge against inflation. But for most investors, the key driver for real estate? as with any investment? is the bottom line financial result. Capital has been pouring into the U.S. real estate market in the past few years from domestic and international investors. One factor that has helped to fuel that interest is performance. Real estate returns compare favorably to other investment vehicles. The most glaring example of that is corporate bonds. U.S. corporate bonds are producing an annual yield just shy of 3 percent. Although corporate bonds offer a nice safe place to park capital, returns that match the typical rate of inflation is not what most investors are striving to achieve.
Real estate returns can vary widely depending on the individual investment. For example, the purchase of a Walgreens property that is leased to the A credit company on a long-term lease functions much like a bond and is often priced accordingly. Depending on the location, Walgreens net lease investments are producing returns of 4 to 4.5 percent. Investors with a higher tolerance for risk can opt for more opportunisticOpportunistic real estate investments are the most high risk/high reward investment opportunities, requiring major development work. Opportunistic properties tend to need significant rehabilitation or are being built from the ground up. They have the chance to reach the highest rate of return for investors, but they little to no in-place cash flow at the time of acquisition and have the... More or value-addProperties are considered value-add when they have management or operational problems, require some physical improvements and/or suffer from capital constraints. By making physical improvements to the asset that will allow it to command higher rents – remodeling the kitchens in multi-family, installing more energy efficient heating systems in a medical office, etc. – improve the quality of tenants and increase... More opportunities, such as a new development or redevelopment, with returns in the teens or even higher.
REITs have generally been the popular choice for investors looking to put $5,000, $10,000 or $20,000 to work in real estate. REITs are easily accessible for individual investors. Crowdfunding is now giving REITs a run for that money with the same accessibility and the added incentive of more attractive returns.
So how do REITModeled after mutual funds, a REIT (real estate investment trust) is a company that owns, operates or finances income-producing real estate. They allow individual investors to buy shares in commercial real estate portfolios.... More returns stack up to crowdfunding investments? Over the past 10 years, the REIT Index from NAREIT performed at a very respectable 8.8 percent. However, there have been big swings in the year-over-year returns of late. Total annual REIT returns have ranged from a high of 27.5 percent in 2010 at the beginning of the recovery to a slight 3.2 percent in 2013. Non-traded REITs are another option for investors, but they have traditionally been saddled with a high fee structure that detracts from the overall return to investors. The front-end fees on non-traded REITs average 9.9 percent, according to data from Blue Vault Partners.
The returns that crowdfunding investments deliver depends on the individual deal. Certainly, there are crowdfunding deals that offer safe, income-producing plays similar to that net lease Walgreens deal. Crowdfunding also gives buyers access to more value-add investments and an opportunity to achieve higher returns. For example, CrowdStreet has raised capital to fund a mezzanine note for a senior housing development in Indiana with a target maturity of 18 to 24 months. The target annual yield on the investment was 14 percent with 10 percent of those payments distributed quarterly and the final 4 percent paid as a special distribution at the end of the project.
Some might wonder if that performance is an anomaly. Yet there is plenty of industry data that shows that private equity investments have a solid track record of outperforming both public REITs and the S&P 500. The 10-year annualized return for all private equity investments is 14.2 percent, well ahead of the 8.8 percent annual returns that the public REIT Index generated over the same period, according to data from the Private Equity Growth Capital Council. In addition, private equity also outperformed the S&P 500 by 6 percent for the 10-year performance and even 1 percent over the 5-year period, despite the recent bull run in the stock market.
Any seasoned real estate investor will tell you that no real estate investment is without some degree of risk, yes, even the Walgreens deal. So, why not choose an investment vehicle that better compensates for that risk?
