The allocation strategy for investors eyeing the commercial real estate market ultimately depends on their risk-return appetite. Investors looking for a bond substitute would do well to invest in Class A conventional real estate sectors (property types) and sub-sectors benefiting from strong growth tailwinds. For example, rapid growth in e-commerce has accelerated demand for industrial assets, while the de-urbanization trend is driving interest in suburban residential and office assets. On the other hand, investors who are more open to taking risk—and have the right operational expertise and capital spending abilities—could benefit from opportunities emerging in niche, fast-growing sectors, such as mixed-use and light assembly warehouses, co-working spaces, and life sciences buildings.
Here are a few questions that may help you determine the right property type to choose:
What is the overall composition of your portfolio?
What is your budget?
What is your ideal risk profile for investments?
What is your target rate of return?
How long do you want to/can you hold the asset?
How much operational work are you willing to do?
Despite the inherent risks, commercial real estate is generally considered a stable investment that generates steady annualized cash flows and solid returns over a long period of time. Over the years, it has become an integral part of a well-diversified and balanced investment portfolio, comprising stocks, bonds, and other alternative assets. As with any investment, however, developing a sound understanding of commercial real estate investing and all its parameters will ultimately determine success and profitability.
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