Real estate indicators by Managing Director Jules Sherwood of HFF's Denver office.
This article is written to frame the benefits and risks of a private individual or wealthy family investing in commercial real estate (CRE). Understand that we are not attorneys or accountants, and this should not be taken as legal or tax advice, so please consult your appropriate professional advisors before making any investments.
We assume for this discussion that, since you are reading this, you are an educated investor with a high income and/or net worth, do not work in commercial real estate as your primary profession and already have a diversified portfolio of investments (stocks, bonds, etc...). The intent here is offer a primer before making your first direct investment in commercial real estate and to increase your awareness of this asset class as another investment alternative.
Commercial real estate is generally defined as income-producing property that contains more than four residential units under one roof. That means that basically every other property, such as office buildings, retail properties, apartment complexes, medical office buildings, industrial facilities or warehouses, student housing properties, hotels, mixed-use properties and self-storage assets are all examples of commercial real estate.
The most common drivers for investors to pursue commercial properties are to realize a more substantial and direct regular cash flow from their investment and the ability to use debt to leverage their returns. Some of the main benefits that attract investors to CRE are:
As with any investment, an investor should understand his or her risk tolerance before considering buying commercial real estate and consult with legal, tax, financial and other professional advisors before investing. With that said, CRE is not risk free and, generally, there are four risk/return profiles that CRE investments will fit into:
These general classifications are a sliding scale of risk and return, with core properties carrying the lowest risk, in place stable cash flow but also the lowest relative returns. At the other end of the spectrum, opportunistic properties carry very high anticipated returns, typically due to a sale after fixing the property. These types of properties may not even have any current cash flow and often require significant expenditures in leasing and/or the property and hence carry a very high risk that these returns may not be realized.
CRE is different than other investment vehicles, and this inherent unfamiliarity may create risks for some investors, specifically:
High-net-worth individuals and wealthy families have a dearth of options to invest their money, and we hope that this brief overview helped educate you on the risks and benefits of directly acquiring Commercial Real Estate in your portfolio. We hope that you will inquire further into the space and ask a commercial real estate professional for more detailed information about how to select a property type that fits your risk profile, how to finance that acquisition and for recommendations as to how to best operate that property.
Jules Sherwood is a managing director in HFF's Denver office and has more than 11 years of experience in commercial real estate. He focuses primarily on commercial middle market investment sales transactions throughout the Rocky Mountain region, works closely with the national loan/REO sales group and provides online auction expertise to clients of the firm. During the course of his career, Mr. Sherwood has completed in excess of $850 million in commercial real estate transactions.
Mr. Sherwood joined HFF in 2015. He joins HFF from Rockwood Real Estate Advisors, where he was opened the Denver office of the firm, which is a wholly owned subsidiary of Auction.com. Additionally, he was lead broker for the office and broker of record for more than 20 states and more than 100 transactions during a two-year period. Prior to that, he was the regional director of real estate for the western United States for Trigild and also held development positions at J.F. Shea Company and KB Home. A lieutenant in the United States Navy, Mr. Sherwood earned his Bachelor of Science degree from Cornell University and his MBA from Arizona State University.