In A World Focused On Short-Term Results, CRE Remains An Attractive Investment
As June came to an end, many investors were likely relieved to put the stock market’s worst first half since 1970 in the rearview mirror. During the same six months, however, investments in commercial real estate generally continued to perform well.
That is why many investors continue to view CRE as a relatively safe investment in any economic climate.
“You might not feel comfortable owning the stock of a company for decades on end,” said Dwight Dunton, founder and CEO of Bonaventure, an alternative asset manager specializing in design, construction, property management and investment management of multifamily properties. “But you could own a building for decades on end, and I think that's very powerful to investors in this world of short-termism.”
Bisnow recently spoke with Dunton to get his thoughts on why CRE continues to attract, and reward, investors.
Bisnow: What is the appeal of CRE to investors during uncertain economic times?
Dunton: It's a physical asset that you can see and touch, and it doesn't exist ephemerally like certain other assets. I think that meets a psychological need for people, who often need something tangible to be able to feel secure.
I think the other thing is that CRE provides consistent returns that are not as cyclical as the general economy. If you take the apartment business, for example, employment may go down or people may get less hours or their wages may be cut, but they always need a place to live.
And I think that’s true of other types of property on the CRE spectrum: While companies may cut back on the number of employees they might need, they still have very long-term office leases, usually five to 10 years or so.
Even during periods of economic decline, there is durability in the underlying fundamentals of the real estate income stream.
Bisnow: What advice do you have for people who are considering investing in CRE for the first time?
Dunton: They need to know what they're buying.
Some investments that are labeled "commercial real estate" have been sliced and diced by the wizards of Wall Street. And while it may be labeled CRE, depending on how much leverage and financial tools have been shoved under the hood, it starts to resemble something a lot further from the actual buildings that are inside the wrapper.
Beyond that, they need to understand the leverage that's in place, what the interest rate risk is, what the underlying lease term contracts look like and so on.
Bisnow: What role can private REITs play in a CRE investment portfolio?
Dunton: I think nontraded REITs can allow investors to get access to institutional-quality real estate without having to deal with the public market impact of owning real estate.
By that I mean a publicly listed REIT will not only have the underlying real estate fund fundamentals, but it will also track the overall stock market. A lot of people already have a lot of exposure to the stock market through their portfolio or their retirement funds.
If you invest in commercial real estate via public REITs, you need to be aware that the share price is going to change. A nontraded REIT, on the other hand, is generally valued exclusively on the real estate fundamentals, and so you don't have the volatility associated with public markets and you don't have to figure out how much of the share price reflects the public equity market versus the fundamentals of the underlying real estate.
Bisnow: How can an Umbrella Partnership Real Estate Investment Trust strategy benefit investors?
Dunton: An UPREIT is a transaction where somebody who owns a building can do a tax-free exchange to effectively become a shareholder in the REIT on a tax-free exchange basis. It is a powerful tool for somebody who would like to sell but is prevented from doing so because they have a low tax basis.
Bisnow: How does real estate play into portfolio diversification?
Dunton: If you have a good building in the right location, it is an asset that you could own for decades and have long-term compounding returns. That is not usually the case with other forms of owning assets. This is a tool to help people focus on their long-term goals in a more passive manner.
Bisnow: What is Bonaventure’s investment strategy?
Dunton: As real estate has become more of a mainstream asset class, it's become institutionalized and subject to the same short-term scrutiny that public market assets such as stocks have. This is where people focus on one quarter at a time and therefore sometimes decisions are made that are in the short-term best interest but may not be in the long-term best interest.
We, on the other hand, have a long-term horizon in real estate investing and focus on owning assets where we can have durable long-term and tax-efficient compounding, and we work with investors and other property owners who share that long-term perspective. They're not trying to get into an asset and flip it within three years.
Flipping can be difficult because while real estate is a stable asset class, it's not entirely immune from the business cycle. If you're forced to sell an asset when the business cycle is soft then you can take a loss, versus if you have the ability to hold it through that. But in general, real estate values have always recovered and that's where we focus on investing.
We remain convinced that CRE is a strong investment, especially during turbulent and unpredictable financial times. The mix of options available within the industry itself — such as through private nontraded REITs and unique UPREIT transactions — will continue to appeal to investors who are looking to diversify their investment portfolios.
This article was produced in collaboration between Studio B and Bonaventure. Bisnow news staff was not involved in the production of this content.
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