It is almost a decade passed now since the Commercial Real Estate or CRE market faced a downturn and survived. Naturally, it may make you thing whether it is the right time to start investing in CRE debt or whether you should wait and watch for some more time.
Well, if you believe in the experts in real estate market and investment then it is about time that you make an investment in CRE debt. This is because this considered as the best time in the commercial real estate market cycle that has the maximum potential to bring in very high and attractive current returns on your investment.
With that said, you must consider the influencing factors that may eventually affect the value and volume of the returns. Research and considerable knowledge is as necessary in making investments as it is in making the right choice of loans offered by different traditional banks as well as online sources such as Libertylending.com and its likes.
Border your wagers
Considering the commercial real estate market of the US and its fundamentals, it is pretty healthy now. It is seen that there are few positives noticed such as:
- There is a significant rise in the interest rates
- Better and higher yields are being generated and
- The prices are found to be leveling off.
It is also noticed that the values on the other hand are even beginning to fall for some specific types of properties in a few specific markets.
With all these changes it is expected that the real estate market is highly likely to achieve the cyclical peak. That signifies it is about time that the real estate debt investors of the entire world seek a better portfolio hedge so that they can easily and effectively move out of the CRE or Commercial Real Estate equity into debt.
However, you will have to focus on your wagers and curtailed before you start to ensure that you get the desired returns.This is in view with the global practice of the investors over the past decade where it is seen that:
- The investors are consciously driven by a lack of revenuefrom the conventional asset classes. These include the bonds and equities.
- Over the years these have directed noteworthy capital to alternate investments with relatively favorable returns when commercial real estate market is considered especially.
- It is also noted that there has been a significant increase in the capital flows which have in turn resulted in the price appreciation of commercial properties.
- In addition to that a notable cap rate compression is also experienced that has forced the Federal Reserve to raise their federal funds rate benchmark. Surprisingly, they have increased it over seven times since 2015.
- What is even more surprising is that even after a seven time increment the Fed has still signaled their intent to raise it even further several times in 2019 and before the year end.
What does all these rate hikes signify? This signifies that in the years to come there will be a strong demand for more commercial real assets. This will in turn pushdown the property returns as well.
Technically speaking, it is the cap rate compression as well as the high property values that have slowed down the acquisition activity. However, the experts think that there is still a significant possibility of the equity capital to seek high returns in the commercial real estate market.
Size always matters
Therefore, you must consider the size as well when you want to make commercial real estate debt investing. This is a strategy that will help you to deal effectively and efficiently with a larger and more addressable real estate market that deals with commercial properties. These are few interesting and noteworthy pints that will help you to make the right decision at the right time.
- According to research firm Prequin you will come to know a few interesting and promising facts. However, the most significant one amongst all is that it is expected that by the end of first quarter this year and as compared to that of the previous year, the private commercial real estate equity funds on a global scale will be well over $216 billion.
- This availability of capital is however likely to continue and will in turn help to drive higher equity returns down as the fund managers will push to allocate their funds.
- According to another data published by the Federal Reserveat the end of 2017 it was found that the total outstanding amount of commercial real estate debt was roughly $4 trillion and this included multifamily debts.
- Furthermore it was found that the maturing commercial real estate debt stood at about $300 to $400 billion per year and that amount needs to be refinanced. This means there is a high chance that it will create a substantial demand for capital raising in the years to come.
- It is also noticed that out of the total $4 trillion of commercial real estate debt, it is about 70% is held by the traditional lending institutions like banks currently. However, the other traditional financing sources have also impacted significantly due to the regulations of Dodd- Frank and Basel III.
- It is due to these tauter regulatory requirements that all these traditional lenders have become more skeptical and conservative. They have begun to curtail retrenching and leveraging from specific market sectors such as construction loans and financing.
- As a result of all these changes and regulations it is highly possible that the rise in demand for commercial real estate financing will continue as it does currently. It may even be possible that such a rise in demand surpasses the supply thereby creating an ever existent funding gap in the commercial real estate market.
This will in turn pave the path for the alternative lenders to enter into the market to fill this void which is still at its initial stage with only about 10% penetration recorded as off 2017 according to the study report of Prequin.