Why You Should Invest Outside Your Backyard
Commercial real estate may be a global marketplace, but 40% of Illinois net-lease product is still being purchased by local investors. (To be fair, flying is a pain.) Midwesterners might be better served to drop the conservative act and look for better yield beyond our borders, Marcus & Millichap VP Sean Sharko tells us.
Isolating your investments to your home state and comfort zone can be a risk in itself, he says, and we could learn from buyers in states like California that are open to better deals many miles away. That’s why overseas money is being imported into local net-lease and less operational intensive real estate deals in growing numbers. “Where else can you put cash in a secure place that generates a 5.25% return, with the inherent benefits of real estate depreciation and plentiful debt for high-quality assets?” Sean (above left, with his partner, M&M VP Austin Weisenbeck) says. This year he’s sold smaller assets to a Spanish family, a German investor, and two Canadian private institutions.
The recent $16.6M sale of a 16k SF net-leased Walgreens at 5440 N Clark (above) in Andersonville (a near-record $1,033/SF) is a great example of foreign net-lease success. An overseas partnership bought the property for $13M three years ago and just flipped it to a high-net-worth individual in a 1031 exchange. (Sean and Austin repped the seller; M&M Phoenix SVP Jamie Medress and FVP Mark Ruble repped the buyer.) Quality product is slim, new construction is rare (only in top tier locations), cap rates are down, and deals are cycling quickly, Sean tells us.
Against these new overseas competitors, local investors will sometimes lose out on Chicago-area deals thanks to preconceived notions about submarkets and pricing, Sean notes. (For example, a deep pocket of investors shy away from Cook County because of tax concerns.) While locals have the benefit of touching and feeling the real estate, investors from overseas or even out-of-state can often move more quickly. They’re looking at the investment as a straight yield and credit play, and act swiftly as such, he tells us.