As the commercial real estate sector moves forward in its economic recovery, you can be sure hedge funds, insurance companies, retirement funds, and other institutional bullies will be buying commercial properties in bulk. This will be mostly in downtown core sections of bigger cities. However, they are expanding outside the top 12 markets to the secondary and tertiary markets of smaller cities.
If this is something that you invest in, you can expect to be out bid on most properties you are interested in. However, there are a few things you can do to level the playing field.
First, commercial real estate investing is about relationships. Institutional investors want to buy in bulk and they want to buy fast. They’ll probably send a couple of buyers from NYC or Boston to live in a secondary market for a year or two buying up 10, 20, or more properties. These buyers do not have relationships in your market. Nor will they develop them in a short period of time.
Your strategy is always nurturing your local relationships. This will lead to deals being offered to you that are never made available to institutional investors.
The institutional buyers typically have a clearly defined target market. Maybe all properties have to be no older than five years. They also must be within a five-block radius of your city’s financial hub.
Your strategy is buying older properties in the same area. All boats rise in a rising sea. They probably have a square foot minimum as part of their guidelines. You’re not held to these guidelines. You can invest in smaller older properties surrounding their big investments. As the big guys force rent increases, your investments naturally raise along with the neighborhood.
Having a hedge fund start buying up properties in your city with their millions and billions can be a good thing when you have a strategy that takes advantage of the changes they will make in your local market instead of trying to out bid them on specific properties.
If you’ve been holding commercial real estate and are ready to sell, this could be your big opportunity. Some institutional buyers are starting to move below their minimum standards. Institutional buyers are moving out of primary markets into areas where they can find less risk on smaller deals. These buyers are setting up sub-ventures to pursue small and mid-cap opportunities in secondary and tertiary markets where thy can find higher yield.
In most cases, they are looking for smaller commercial properties that don’t require capital improvements. The commercial lending market is very different from the residential market. Whereas the residential lending market remains tight, there is ample capital available for large commercial loans. Institutional investors are looking to smaller markets where they can leverage debt into high earning yields.
The markets of particular interest are those experiencing low vacancy rates with little to no new construction. Institutional buyers are anticipating high inflation in the near future. Their strategy to combat inflation is borrowing cheap dollars today to be repaid with inflationary rents tomorrow.
However, capital improvements are not out of the question. When relatively small capital improvements can substantially increase net operating income (NOI), large investors are willing to borrow or invest in smaller commercial properties. Today is an opportunistic time for commercial investors that believe interest rates will rise along with inflation. Locking in low interest long term loans ahead of an inflationary economy is becoming a common commercial real estate profit strategy.
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