Commercial Real Estate

True or False: Commercial Real Estate Is Guaranteed to Perform Better Than Stocks

Expertise:
12 Articles Written
white main behind window sitting at table with phone and tablet and inquisitive expression

Could this be true? Is anything guaranteed in real estate?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Short answer? No. Real estate assets, like assets in any other investment class, are not all profits and gains. While real estate investments tend to perform as well or better than equities in the long-term, there is no such thing as a sure bet.

Successful real estate investing requires diligence and the ability to mine insights from local, regional, and national data relating to the commercial real estate space. It also requires the ability to identify and quantify risk—to hopefully avoid losses or unimpressive returns.

The Risks

The fool learns from his own mistakes, and the wise man learns from the mistakes of others. With that in mind, let’s take a look at some of the potential pitfalls you may run into with investments in commercial real estate.

Economic Downturns

Real estate investors tend to suffer during recessionary periods. As the real estate sector closely mirrors the economy as a whole, contractions are felt by real estate investors far more than other recession-resistant investments, like precious metals, T-Bills, and certain equities. As businesses fail or downsize, property owners can expect interruptions in their rental income and a harder path forward when it comes to filling vacancies in commercial spaces.

Related: Bonds vs. Stocks vs. Real Estate: Which One Wins?

Recessions may also cause property prices to drop, which may decrease their ROI from price appreciation. Some real estate types, multifamily residential in particular, are somewhat resistant to recessionary pressures. When the economy drops, people still need a place to live. A similar line of thinking is why investors buy utility stocks when they feel a downturn is coming—no matter what, the electric bill needs to be paid.

Local/Regional Factors

Real estate investments are highly dependent on the communities in which they reside. Local metrics like population growth, average income, employment numbers, and many other data points can make or break your investment in an area. For example, cities with a high dependence on one employer may be prone to substantial volatility and losses if that employer decides to leave the area.

The existing and planned housing supply in an area can also introduce a measure of risk to a property acquisition or development. Supply risk in real estate is affected by the total amount of competing buildings in the area, plus those planned for construction in the near term.

recordkeeping-time

Imagine you are planning to develop a multifamily building in a small suburb of Kansas City. Before entering that market, you should examine both current residential housing supply—both single-family homes and multifamily—to ensure that you will be able to attain and maintain your necessary vacancy rate for generating a return on your investment.

Related: Why the Wealthy Put Their Money Into Multifamily & Commercial Real Estate

These are just two examples of market factors that can introduce a fair amount of risk into a real estate investment. Before developing or investing in an area, do a deep-dive into local property stats, which are published by private entities and the local, state, and federal governments.

Blazing Your Own Path

While there are few guarantees in the real estate investment world, commercial and residential properties do offer investors an almost unmatched ability to “steer their own ship” and make decisions that can positively impact the ROI of a real estate assets. The same level of control is not possible with traditional equities, bonds, precious metals, and other investment classes where your investment is at the mercy of the market.

Most of this ability to change the course of your investment comes before breaking ground on a project or making an acquisition, but even if you are holding an under-performing asset, there are ways to increase returns. Upgrades and renovations can help increase cash flow and can be used to defer, reduce, or eliminate your eventual tax bill. The fact that you can make these changes directly is why many active investors gravitate toward real estate.

The Bottom Line

Nothing is guaranteed, in life and in real estate. Real estate investments hold real risks that should be taken into account and certainly not discounted without due diligence. Despite the potential risk, the right real estate investment has the potential to generate substantial returns, beyond most asset classes. This fact, combined with real estate’s tax-advantaged status and government incentives, make real estate a solid addition to many investment and retirement portfolios.

Questions? Comments? 

Leave them below!

Since founding Trion Properties, a private equity investment company that specializes primarily in value-add multifamily real estate investments and ground-up developments, Max Sharkansky has led the acquisition, renovation, and disposition of over $300 million in mismanaged and distressed assets. Max, along with partner Mitch Paskover, formed Trion in 2006 and successfully formulated a strategy of acquiring "diamond-in-the-rough" multifamily properties and creating value through renovations, creative rebrands, hands-on management, and the improvement of operating efficiencies. Max’s expertise of the marketplace has been instrumental in the firm’s success. Find out more about investing with Trion at Trion-Properties.com.

    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 month ago
    I am very head shy about the commercial real estate market. It used to be pure gold. Now, with the internet and personal computers, the market has been contracting for years. We have a lot of commercial buildings that are vacant in our area.
    Dave Rav from Summerville, SC
    Replied about 1 month ago
    I'm in agreement with the first part of the article - no sure bets! No guarantees (in anything, really!). However, I also agree in the fact that one has more control over the RE asset. (now, some may not want this control! However, with use of a property manager you can stay relatively passive, but yet have significant control over the asset). Lets also talk about the leverage of borrowed money. I can borrow money to invest in RE and get a return - can we do this with stocks? And how about if I invest ZERO of my own money into RE and still get a what, 25% or 30% return? In actuality my return on my money is infinite isn't it? Can I do this with stocks?
    Brad Shepherd Syndicator from Austin, TX
    Replied 22 days ago
    "Real estate investors tend to suffer during recessionary periods." I think many investors would disagree with this. Savvy ones set themselves up well for downturns and take advantage of the great pricing. I'm looking forward to the next one like many others are. And the asset class surely makes a difference. Those renting retail spaces to small local business might get in a pinch. But working class housing, not as likely since these assets perform well during downturns.