Balance and diversification are the hallmarks of a strong investment portfolio. Specifically allocating a portion of an investment portfolio to a long-term investment in commercial real estate can help diversify a portfolio of stocks and bonds and smooth risk. This type of investment may also provide an income stream and hedge against inflation. Take a deeper look at the benefits of investing in commercial real estate below.

Real Estate Investment Opportunities

Commercial real estate has its place in a well-balanced investment portfolio. Investors who might not be able to purchase commercial property on their own can invest in real estate investment trusts (REITs), limited partnerships, real estate mutual funds or exchange-traded funds. Institutional investors such as pension funds and endowments regularly allocate 10 to 12 percent of their investment portfolio to real estate.

Portfolio Diversification

Additional layers of diversification can come from the real estate portfolio itself if it is diversified by property type, location, tenant, industry and/or lease term. Because most real estate markets are cyclical in nature, this type of investment strategy may allow commercial real estate owners and investors to more effectively deploy capital into sectors and locations where the underlying investment fundamentals are relatively strong and away from sectors where the fundamentals are relatively weak. This type of diversification may also offer investors significant benefits given the level of risk relative to a portfolio concentrated on one property sector or properties located in one geographical area. Over time, this can help smooth risk and increase returns on a portfolio. However, there is no assurance that a diversified portfolio will be created or that such a portfolio will provide greater benefits to stockholders than a portfolio that is more concentrated in any particular individual real estate investment sector or location.

Income

The leasing of high-quality commercial real estate is generally designed with the objective of providing investors with a recurring stream of income since long-term leases, which are typical in many commercial real estate sectors, may provide predictable cash flow. Another way that an investment in commercial real estate may provide income is through specific investment vehicles. A popular one is the REIT. Since REITs must pay at least 90 percent of their REIT taxable income to stockholders in the form of distributions on an annual basis, they potentially provide a consistent stream of income. Distributions are typically paid on a monthly or quarterly basis. The actual amount and timing of distributions is not guaranteed and depends on the amount of funds available. There is no assurance that a recurring income stream will be generated or will continue, and there can be no guarantee that these objectives can be met.

Potential Hedge Against Inflation

As prices of goods and services increase in the broader economy, real estate can benefit. Rental increases are generally built into long-term leases in the retail, office and industrial sectors. Percentage rent increases are common in retail leases, whereby property owners receive an increase in rental income when a retailer reaches a certain threshold in sales. The multifamily sector can adjust rents when leases expire, typically on an annual basis. And hotels have the flexibility to change their “leases” (i.e., their rates) on a daily basis. Investors in real estate can also benefit from the increase in property value that may occur over time. There is no assurance that rental increases or increases in property value will occur.

Investors should consider their allocation in real estate a long-term investment, in which they do not require immediate liquidity. Over the long term, they may generate income and experience moderate growth in their investment.

Disclosure

This is neither an offer to sell nor a solicitation of an offer to buy any security, which can be made only by a prospectus, which has been filed or registered with appropriate state and federal regulatory agencies and sold only by broker dealers authorized to do so. An offering is made only by means of the prospectus in order to understand fully all of the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with any offering.

The views expressed herein are subject to change based upon economic, real estate and other market conditions. These views should not be relied upon for investment advice. Any forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

Important Risk Factors to Consider

Real estate investment trusts (“REITs”), 1031 exchange private placements, private placement limited partnerships and a private placement limited liability company (“LLC”) may be referred to herein as “real estate funds.” Risks of these real estate funds include, but are not limited to, the following:

Investments in real estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting a real estate fund’s ability to promptly vary its portfolio in response to changing economic, financial and investment conditions. Investments in properties also are subject to adverse changes in general economic conditions which, for example, reduce the demand for rental space.

Among the factors that could impact a real estate fund’s properties and the value of an investment in it are:

  • local conditions such as an oversupply of space or reduced demand for properties of the type that a real estate fund seeks to acquire;
  • inability to collect rent from tenants;
  • vacancies or inability to rent space on favorable terms;
  • inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;
  • adverse changes in the laws and regulations applicable to a real estate fund;
  • the relative illiquidity of real estate investments;
  • changing market demographics;
  • an inability to acquire and finance properties on favorable terms, if at all;
  • acts of God, such as earthquakes, floods or other uninsured losses; and
  • changes or increases in interest rates and availability of financing.

In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases.

Publication Date: 07.15.2013