2012 Commercial Real Estate Outlook: Introduction
The following outlook is the final piece to the 2012 Real Estate Outlook, released in February. It is dedicated exclusively to the commercial real estate sector.
The goal with this analysis, just as with the residential real estate outlook, is to look at the basic fundamentals of the market and open your mind to areas of the market that are normally not considered in a regular discussion/analysis on future price direction.
The commercial real estate market has the ability to provide investors with a tremendous amount of leverage (borrowed money). When the asset class is moving up in price, leverage is considered one of the investment's greatest attributes. When the asset moves down in price, an investor feels the other side of the double-edged sword. For example, if you put $100,000 down on a $1,000,000 commercial building and the value of the building rises by 10% in one year, what is your cash on cash return (return on the capital you invested)? The answer is 100%, even though the value of the underlying asset only rose by 10%.
Investors looking to find that kind of leverage in stocks, bonds, or commodities will come up well short (an investor would need to move into the derivatives to find that leverage power). For this reason, real estate will always be an attractive investment for those that know how to play with and respect the power of leverage.
Making a few well timed and well managed moves in commercial real estate has the potential to set someone free for life financially. Making one major mistake could take every asset that person has accumulated, along with their credit.
I will take time over the next few pages to explain and paint a picture of why the commercial real estate market is facing another leg down in prices over the next 3 - 5 years. I will explain why this downturn will provide one of the greatest investment opportunities of our lifetime and why investors should begin to prepare for the coming buying opportunities today.
Let's begin with an overview on how commercial estate is valued and where those valuations will be moving in the years ahead.
Next: Commercial Real Estate Outlook: How Prices Are Determined
The goal with this analysis, just as with the residential real estate outlook, is to look at the basic fundamentals of the market and open your mind to areas of the market that are normally not considered in a regular discussion/analysis on future price direction.
The commercial real estate market has the ability to provide investors with a tremendous amount of leverage (borrowed money). When the asset class is moving up in price, leverage is considered one of the investment's greatest attributes. When the asset moves down in price, an investor feels the other side of the double-edged sword. For example, if you put $100,000 down on a $1,000,000 commercial building and the value of the building rises by 10% in one year, what is your cash on cash return (return on the capital you invested)? The answer is 100%, even though the value of the underlying asset only rose by 10%.
Investors looking to find that kind of leverage in stocks, bonds, or commodities will come up well short (an investor would need to move into the derivatives to find that leverage power). For this reason, real estate will always be an attractive investment for those that know how to play with and respect the power of leverage.
Making a few well timed and well managed moves in commercial real estate has the potential to set someone free for life financially. Making one major mistake could take every asset that person has accumulated, along with their credit.
I will take time over the next few pages to explain and paint a picture of why the commercial real estate market is facing another leg down in prices over the next 3 - 5 years. I will explain why this downturn will provide one of the greatest investment opportunities of our lifetime and why investors should begin to prepare for the coming buying opportunities today.
Let's begin with an overview on how commercial estate is valued and where those valuations will be moving in the years ahead.
Next: Commercial Real Estate Outlook: How Prices Are Determined
Excellent article my friend. This is exactly what I've been looking for for quite a time now. You have my gratitude man.
ReplyDeleteREO Properties Florida