Why Buying CRE Makes Sense Despite Rising Uncertainty

When headwinds begin to mount, some CRE investors go to the sidelines and wait it out. But is that the best strategy?

“It makes perfect sense to be cautious, but on the flip side a lot of investors stay active or even turn things up a notch when others are stepping aside,” says Marcus & Millichap’s John Chang. “In many cases, the deals they do in these times deliver the strongest returns over the long haul.”

Chang notes that the CRE market is generally “inefficient,” with nuances by property type and location. One metro could face serious headwinds, he says, while another is growing

“Think back to the dot-com bubble,” Chang says. “That recession hit markets like the Bay Area particularly hard, but many other markets held up well and continued to grow.”

He also encourages investors to seek out value-add opportunities, Chang says. Buying an asset now that’s considered overpriced by sales comps could be beneficial, he says, if by acquiring this asset, the buyer will be able to consolidate and upgrade a cluster of properties, generating a stronger return on an entire portfolio. Uncertain times can also present opportunities to buy unique assets that rarely trade, he says, or to reposition assets.

“Times of uncertainty may be the best time to change horses,” Chang says.

Investors also should think about where market demand will be in three to five years. Chang recommends utilizing debt without pre-payment penalties when acquiring properties so the properties can be refinanced if and when interest rates fall.

“Investors who buy in periods of uncertainty often face less competition at the table and reap long-term rewards,” Chang says. Conversely, investors who “step to the sidelines with the herd because they fear doing a deal when the market is uncertain often miss the best opportunities the market offers. Real estate investing is all about thinking long term, capitalizing on opportunities and keeping your eyes on the horizon.”