We’re going through a tough CRE market, but knowing how to invest wisely will get us through it.
A tough US property market means having the right commercial real estate investment strategies up your sleeve is now a necessity rather than a luxury.
If you’re a CRE investor, then you’ll know how crucial this is in a real estate market that has:
The CRE market is tough now. In the last quarter of 2023, loan growth fell despite falling interest rates, while credit tightening stayed above 60%, according to data from the Federal Reserve.
This suggests that lenders are tightening standards in response to a perceived high-risk market.
Source: Altus Group Research and Federal Reserve
Creating smart commercial real estate investment strategies to navigate these challenges is a tall order, so what better way to find out how to do it than by asking CRE experts?
We asked several CRE experts the following question: what are the best real estate strategies to generate higher returns right now? And are there any CRE market trends that we should be aware of that influence these?
Continue reading for some exclusive insights.
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The current property market is challenging, so knowing how to make money in commercial real estate right now requires a different skill set from the past.
Traditionally, CRE investors profited through several methods:
However, the current market demands CRE investors do more than collect rent and wait for their property to appreciate.
If you want profitability (and to learn how to invest in commercial real estate with little money) you’re going to have to get creative in your value-add strategy while fine-tuning your risk profile and financing.
The next section explores strategies outside traditional thinking and may even help you look at commercial real estate investment in a new light.
The CRE landscape is changing, and investors are getting creative. Here are four hot commercial real estate investment strategies to watch.
When the going gets tough, the best investors make lemonade when life gives them lemons.
In the CRE industry, you might find the potential to make lemonade (or capital gains) in places you didn’t think of, including old office buildings that are tumbling in value across the US.
Prices fell by as much as 40% in San Francisco in late 2023 as key US cities bore the brunt of the trend, according to data from investment experts MSCI Assets.
Source: MSCI Assets (via Bloomberg)
John Morelli is the managing director of INSIGNIA Financial Services LLC, a non-bank lender, and capital markets advisory firm. He believes the repurposing of downtown real estate into residential properties, and distribution has been underway for some time, even before the shift to remote working.
“We're headed toward a different future for prime (downtown) real estate. Especially in larger cities, people feel like our there are better use cases for prime downtown and city-center commercial real estate than simply office buildings.”
What type of properties would fall into this bracket? Well, various types of commercial space tick several boxes for upgrades, thanks to their size and capacity to be split into separate units.
Malls are an emerging renovation option for investors that were considered infeasible just a few years ago due to high capital and planning requirements.
Now, according to Morelli, A handful of suburban shopping mall owners are working to redevelop their assets into vibrant mixed-use hubs of retail, entertainment, and housing . He cites one key example.“Stratford Square Mall in Bloomingdale, IL, has gone from struggling with a 25% occupancy to an acquisition by the Village and a multi-million dollar redevelopment plan.”
Repurposed commercial spaces could also contribute to the growing demand for e-commerce and data centers, an appetite illustrated by Deloitte’s 2024 CRE outlook that lists “digital economy” opportunities like these as a top opportunity for investors.
Digital economy use (i.e e-commerce and data centers) is the top risk-adjusted opportunity for CRE investors
Source: Deloitte
“There’s a very strong argument for adapting (urban commercial space) to e-commerce distribution and warehousing”, says John. “There’s a lot of demand to adapt these properties to affordable housing, last mile and cold storage.”
What other type of space could be a source of these value-adds? Try thinking outside of the box, says Anna Kogan, CEO and founder of soft deposit funding provider Duckfund.
“While the market environment is challenging, new investment opportunities arise in unexpected spaces. The redevelopment of old manufacturing facilities, film studios, parking lots, and innovative storage solutions is worth exploring when diversifying one’s investment portfolio.
As the CRE market brings new challenges, it appears creative thinking and diversification in our property searches will be levers for success in the short-to-mid term.
One of the reasons the repositioning of commercial spaces like old shopping malls is becoming more feasible is due to outside help in meeting high development costs.
Late last year, the Biden administration announced its plan to “supercharge” the office-to-housing conversion by earmarking $35 billion for below-market-rate loans. NYC Mayor Eric Adams also gave the green light to a policy that relaxes conversion eligibility rules.
If other states introduce their own programs, then it could open the door for many CRE developers.
John Morelli believes this may arrive in several interesting ways. “I think there will be a variety of economic funding measures. New specialized TIF funding zones, for example, will allow investors to repurpose these properties and help solve some of the housing shortages”
Indeed, several towns and cities in Minnesota announced their plan to turn to TIF funds to repurpose their downtowns, including a $26 million project in St. Paul.
Yet, John Morelli also urges caution. “Constrained capital and cost of capital will continue to be the number one barrier (to CRE investors).”
His thoughts are echoed elsewhere in the CRE industry. Stash Geleszinski is a Managing Director at Capstone Companies, the largest privately held multifamily investment sales firm in the US. He stresses a need to use public subsidies, but for investors to be shrewd with them.
“It’s more expensive to build now than ever”, says Stash. “So you really need to be savvy when using public funds, like tax credits, abatements, and TIF agreements. But I know investors who used them to clean up and renovate an old munitions factory into 134 brand new apartments, so the repurposing potential is there”.
So, where would a CRE investor go to receive help with real estate investing tax strategies like this?
“There are consultants that specialize in this type of funding,” affirms Stash. “These are sometimes former developers who have worked with the likes of the HUD and other public agencies and understand how to navigate all the bureaucracy that comes with it”.
When used strategically, it appears public funding can power creative conversions that breathe new life into old buildings and communities.
The commercial real estate market is unpredictable, and unforeseen events can significantly impact an investment's performance. This is why stress testing has become a crucial tool for real estate investors.
Stress testing involves simulating how an investment might react to various negative scenarios. We can test its risk tolerance by incorporating several outcomes into a financial model.
“The key in navigating current market fluctuations is to have strong in-house analytical and financial skills to make sure every investment opportunity is well evaluated”, says Anna Kogan. “Long-term financing options is one vital area: pay attention to upfront fees, early repayment fees and other hidden commissions, as well as the fix vs float interest rate. Running a stress test with several cost of capital growth options is useful.”
This type of due diligence could lead to two benefits:
Stress testing can help you in several other areas. Imagine you're thinking about buying a small mall to hold onto for five years. Before taking the plunge, you'd want to be sure it can make enough money. Stress testing will help you build a risk profile.
In this example, you may be worried about empty stores, so you use vacancy rate as their stress test. You might then ask something like "What if more stores become 5% vacant?”. The stress test will show you the income the mall must make to cover this. This way, you can make more informed investment decisions.
An example of a stress test for vacancies, including rental income and expenses
Source: FR Realty Partners
When discussing real estate investment strategies for commercial properties in the USA, you might think of bold, risk-taking maneuvers – but a low-key tactic like stress testing may be the smartest move to make.
Commercial real estate offers a compelling path to building wealth, but securing financing is crucial from the very beginning.
In recent years, good faith deposits, or earnest money, have become standard practice in a competitive market. These deposits show sellers you're serious about the deal, but without guaranteed access to financing, securing these deposits can be a hurdle.
Then there’s the question of long-term financing for which you will need to justify your viability as a borrower as well as consider the potential capital appreciation involved, be it a value-added, core-plus, or core investment.
Understanding financing options specific to whichever your CRE asset class is one of the investment fundamentals.
Financing also helps you align with your investment objectives and protects your cash flow. You may need a short-term bridge loan to fund a fix-and-flip project, while properties benefit from long-term mortgages with predictable payments so that you can work out a viable income stream.
Also, let’s not forget that financing impacts property value. A well-financed property with a manageable debt structure is more attractive to future buyers, potentially increasing its resale value.
So, how can you make sure you have the right financing in place?
The answer depends on the property type you’re targeting. Retail spaces might require different loan structures than industrial warehouses, for example, while the earnest money for office space in New York will probably be much higher than earnest money in Tennessee.
The key to securing financing with a manageable debt structure is to explore innovative lending solutions. The traditional financial landscape can be slow and cumbersome, but new players are emerging to address the specific needs of CRE investors.
These solutions can help you secure the financing you need to meet your investment goals, including that critical first hurdle of upfront earnest money.
The CRE market moves fast, and having access to fast capital is emerging as one of the key commercial real estate investment strategies. It can be the difference between securing a great deal or missing out entirely.
This is where Duckfund's Sign Now, Pay Later model comes into play as a smart strategy for opportunistic CRE investors to lock down to top-tier real estate.
In today's competitive CRE market, speed and access to capital are king.
Duckfund's Sign Now, Pay Later approach provides these advantages, allowing you to be a more agile investor and build your portfolio faster.
Having a robust financing model may be the smartest investment move you ever make. Contact Duckfund to find out how our Sign Now Pay Later approach can help you grow your portfolio.
