Real Estate Crowdfunding Has Permanently Changed The Commercial Sector

Behind stocks, bonds and cash, commercial real estate has emerged as the fourth largest asset class in the U.S. over the last few decades. Among institutional investors, investments in commercial properties represent nearly 10% of their holdings.

When you look at the typical individual investor’s portfolio, however, there’s often a big hole where commercial real estate is concerned. In fact, for many investors, this particular asset class is a relative unknown.  Previously, stiff barriers to entry meant that direct commercial real estate investments were only available to a select group. Fortunately, real estate crowdfunding is making it possible for a broader base of investors to gain access to this valuable segment of the real estate market.

.                        

Commercial Real Estate Explained

In the simplest sense, commercial real estate is any property that’s designed to produce income. That covers everything from apartment complexes and office buildings to shopping malls and industrial complexes.  Commercial properties generate income in the form of rent paid by tenants and/or appreciation when the property is sold. Investors realize returns based on the property’s income, less any operating, financing and maintenance costs.

Why Commercial Real Estate Is Investor-Friendly

Commercial real estate sets itself apart from other investments on several counts. Many of the features that make it unique are also what make it appealing to investors. There are five key areas where commercial real estate tends to outperform other asset classes:

• Volatility â€“ The stock market can be unpredictable even on the best of days and as we’ve seen over the last several months, real estate has tended to be more stable. On a global scale, certain U.S. real estate markets have become a safe haven of sorts for international investors seeking to escape the troubled Asian financial markets. Compared to stocks, commercial real estate may offer more insulation in terms of price movement. Since returns are derived from rental income in addition to price appreciation, commercial real estate often proves to be a more stable investment during periods of market volatility.

• Inflation â€“ Inflation can be an investment-killer but in the case of commercial real estate, research has shown that there’s a higher degree of correlation compared to other asset classes, particularly when there’s a longer holding period. What this means for investors is that as prices rise in the larger economy, including rental rates, commercial real estate has the potential to become more profitable.

• Returns â€“ In 2015, global economic growth began to slow down and for most asset classes, the year-end numbers were disappointing to say the least. Commercial real estate proved to be an exception however, with occupancy and rental rates holding steady. According to the NCREIF, commercial real estate investments generated a total annual return of 12.71% in 2015.

• Diversification â€“ No matter what you’re investing in, diversification is important because it helps spread out risk. Investing in real estate is a proven way to inject diversification into your holdings and choosing commercial properties allows you to add an entirely new dimension to your portfolio.

• Tax benefits â€“ Owning a piece of real estate directly comes with some tax advantages, such as the ability to deduct depreciation and loan interest. Those deductions can be used to offset the income generated by the property. For a commercial real estate investor, that can add up to a substantial tax break.

Where Does Crowdfunding Come In?

Historically, commercial real estate investments were the exclusive domain of private investors who had the right connections and could afford a five- or six-figure minimum buy-in. Some of the largest institutional investors in the world (including the Harvard and Yale Endowments) have sizable portions of their portfolio allocated to real estate and this has been a major factor in their superior investment performance.  Unfortunately, individual investors have historically been excluded from this potentially profitable asset class.

The passage of the JOBS Act in 2012 lifted restrictions on the advertisement of securities to accredited investors. That, in turn, paved the way for real estate crowdfunding, a new method for individual investors to invest in real estate for as little as a few thousand dollars. At RealtyShares, we’ve been able to witness firsthand the impact that real estate crowdfunding has had on making real estate accessible for individual investors.