Real estate has always been (and probably always will be) a wise investment, including commercial properties. Investing in commercial real estate has always involved risk. However, many investors wonder if that risk is higher in 2019, since online competition has caused many industries to sink.
Should you invest in commercial real estate in 2019? Absolutely – and here’s why:
- Online competition doesn’t squash every industry
If you’re hesitant to invest in real estate because of an increase in online competition, you have good reason to be concerned. However, not every brick-and-mortar industry is squashed by online competition. For example, unless people become so lazy that they refuse to leave the house, grocery stores and restaurants will never fade into the background.
If you’re considering buying a grocery store, you would be making a wise choice. Owning a grocery store won’t make you a billionaire, but it will provide you with a steady stream of reliable income.
You don’t have to start your own chain; you can ride on the coattails of corporate success. Major grocers like Albertsons and Kroger offer opportunities for investors to finance new store developments. Kroger has been around for 150 years and owns successful brands like Food4Less, Fred Meyer, King Soopers, QFC, and Ralph’s.
Online stores aren’t disrupting the food industry
The truth is, people use online meal delivery services but they still visit restaurants with friends and family. Meal delivery services are slightly more expensive than shopping at the grocery store, and the model isn’t as successful as you may think.
Thanks to restaurant and grocery delivery services, meal delivery startups are shutting down as fast as they spring up. For example, San Francisco-based startup Munchery just raised $125 million and is already shutting down. Another San Francisco-based startup called Sprig closed in 2017 after raising $57 million. These delivery services underestimate their overhead and can’t keep up despite raising what looked like adequate capital.
The biggest sign pointing to the longevity of the traditional grocery store is that several food delivery services have been acquired by grocery chains. For instance, in 2018, Hello Fresh announced plans to sell meal kits in nearly 600 grocery stores. Albertson’s acquired Plated in 2017, and Kroger acquired Home Chef in the fall of 2018.
If meal delivery kits can only survive being sold in a traditional grocery store, that says a lot about how strong the grocery industry is.
- Long-term financing is readily available
Whatever type of commercial real estate you’re interested in purchasing, long-term financing is readily available. The most common form is the Commercial Mortgage-Backed Securities (CMBS) loan.
This guide to CMBS loans explains that a CMBS loan is secured by a first-position mortgage lien for a commercial real estate property. The lenders are usually pension companies, life insurers, large banks, bank syndicates, and financial services firms. The best property types for CMBS loans are retail, office, multifamily, hotel, self-storage, industrial, and warehouse properties.
- Commercial real estate will always offer some kind of return
Commerical properties tend to return more than residential properties. The return is estimated between 6-12% per annum as opposed to 1-4% for residential properties.
If you prepare your commercial space correctly, it will be of value in the future even if the current business fails. When you take good care of your space, you won’t have a hard time finding a new tenant. Create a great space and it will become highly sought-after.
- Mixed-use property can provide extra benefits
Don’t rule out commercial property when it’s mixed-use.
Say you invest in a mixed-use property in a popular downtown area that includes a few commercial spaces with a residential unit on either end. You’ll have income in any market. If the economy is down, you’ll have rental income at top dollar due to your location. If the housing market is down and you have to slash the rent to get tenants, you’ll be collecting top dollar from your commercial tenants. As either market ebbs and flows, your income will be virtually guaranteed.
- Commercial property prices are rising – get in while you can
Commercial property prices are trending upwards at a modest pace. Small market (>$2.5 million) property prices rose by 1% from last year. In the large market ($2.5 million and above), sales prices rose 6% nationally.
The NAR expects multi-family and industrial real estate to remain strong commercial asset classes. They say retail brick-and-mortar stores are expected to continue to do well and the market for office space will be fueled by technology-driven jobs.
With that said, it sounds like experts agree that 2019 is the perfect time to invest in commercial real estate.