A Commercial Real Estate Investing Thesis

Real estate has seemingly been on a tear lately, with housing inventory quite low and prices rising rapidly. The S&P CoreLogic Case-Shiller 20-city home price index increased 13.3% from March of 2020 to March of 2021, and anecdotally, increases of 20% to 25% since the start of the pandemic are not at all uncommon.

That’s just one facet of the real estate market, residential real estate. There’s also a huge component of the broader real estate market, and it’s where many passive investors tend to put more of their real estate dollars. That is, commercial real estate.

Within commercial real estate, you’ve got a wide variety of asset types, from multifamily rental housing (considered commercial even though people do live there), office, retail, industrial, medical, self-storage, and more.

How these  have fared in this disrupted economy varies quite a bit, and their outlooks vary, as well. Crowdstreet takes a close look at what to expect in three of these classes in today’s guest post.

For a broader overview and a look at additional asset classes, consider creating a free Crowdstreet account to view their full thesis and browse available investment opportunities.

 

 

Commercial real estate is not a monolith. Different property types, whether it’s the apartment building you live in, the office building you work in, or the retail center where you shop, each have its own economic outlook and provide unique opportunities for real estate investors.

As a leading online real estate investing marketplace, CrowdStreet strives to bring investment opportunities to our investor community that make sense for the moment.

Where are people moving? Population migration impacts the overall demand for multifamily properties. More people shopping online means companies need more warehouse space. If/when people downsize, self-storage units fill up quickly. Our team keeps an eye on the latest industry trends and our Investment Thesis provides a framework for our deal review process, guiding the kinds of projects that make it to our Marketplace.

 

Here is our outlook for just three asset classes:

 

Hospitality

As hospitality is marked-to-market daily, this asset class is a leading indicator for the broader commercial real estate market. Back in January, we hoped that the recovery in the hospitality sector would begin in the second half of 2021 but recent data now suggests the recovery is already underway.

STR is a division of CoStar Group that provides market data on the hotel industry worldwide. Heading into 2021, STR projected a 30% annualized year-over-year increase in RevPAR (revenue per available room) from $45.48 in 2020 to $59.12. But the weekly U.S. RevPAR index is already showing strong momentum, coming in at $66.99 for the week of April 10, a 57 week high and an astounding 87% increase over January’s reported average RevPar of $35.72.

We’re also seeing a dramatic spike in TSA daily throughput. For the first 18 days of April, TSA’s daily throughput averaged 61% of the same timeframe in 2019, hitting a high of 69% on April 3rd. April’s TSA daily throughput activity represents a marked increase over February, which averaged 43% of 2019 levels.

The March jobs report also showed how the industry is staffing up for a recovery. The U.S. added 916,000 jobs in March, with 280,000 jobs added in the Leisure and Hospitality sector. That’s 664,000 jobs added to this sector so far in 2021, a telling sign that the industry is hiring to meet an anticipated spike in summer demand.

While good news currently abounds for resurging demand in the hospitality sector, true recovery at the operating level is still likely months, if not a year away. Despite the increase in demand, the hospitality market still sits in a state of high inefficiency, and the highest performing assets pre-COVID may likely be the ones who benefit the most from the resurgent demand.

 

 

Medical Office

2020 was an unusual time for the medical office sector. The number of visits to certain types of facilities—mostly elective-use practices and dentists—plummeted while critical-use facilities ran at full capacity. However, we believe that the sector should revert to a more normal state this year.

Two types of medical offices stand out for us. The first is small-to-mid-sized medical offices located near hospital campuses. These facilities offer patients easier access compared to offices buried deep inside large hospital campuses and they offer hospital systems and practices lower operating costs. The use of telehealth in such facilities has spiked during the pandemic and we see it continuing to gain traction post-pandemic as an evolution within the sector.

The second use is critical care uses, such as renal care. The initial lockdowns in 2020 highlighted the resilience of this portion of the medical office sector. While visits to general practitioners and dentists were delayed, critical care medical offices continued on at maximum capacity. This factor, combined with the continued growth of the underlying tenants, leads us to believe that properties occupied by such tenants under long-term leases provide relatively attractive income-oriented investments.

 

 

Student Housing

Sometimes a major shock causes a shakeout of a market and brings clarity to its outlook. With student housing, we believe we experienced that market-defining event in 2020, and no other asset class has provided this much clarity this fast.

With an unusually large number of 2020 deferrals attributable to the pandemic, and an expectation of unemployment levels to remain at elevated levels (which often leads to people going back to school), the outlook for fall 2021 enrollment is good. We expect much of the enrollment momentum to shift towards larger universities in major conferences as they leverage the competitive advantages they demonstrated in 2020 to attract the nation’s best students in record numbers which, in turn, will propel their student housing markets. And since location is hyper-critical for this asset class, we particularly interested in projects near or adjacent to campus.

It is important to note that, along with conventional apartments, student housing benefits from the same cheap long-term financing made available through Fannie Mae and Freddie Mac. With the outlook of extremely low agency interest rates for the foreseeable future, the current outsized spreads between borrowing rates and cap rates in student housing should provide upwards pricing pressure for the next few years.

Our team has put our outlook and where we see opportunities for each asset class together in our Investment Thesis. Create a free CrowdStreet account today and get access to the full thesis.

 

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CrowdStreet is a content partner of Physician on FIRE.


This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. The information contained herein or presented herewith is not a recommendation of, or solicitation for, the subscription, purchase or sale of any security or offering, including but not limited to any offering which may invest in the geographic area(s) or asset type(s) mentioned herein, whether or not such offering is posted on the CrowdStreet Marketplace. Though CrowdStreet believes the information contained and compiled herein has been obtained from sources believed to be reliable, CrowdStreet makes no guarantee, warranty or representation about it. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the subject thereof. All projections, forecasts, and estimates of returns or future performance, and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions.


CrowdStreet is not a registered broker-dealer or investment adviser.  Nothing herein 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 to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.

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What are your thoughts? Do you agree of disagree? What would you invest in of the three mentioned above? Comment below!

 

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