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An Overview of the Real Estate Market

When it comes to real estate, most people think about homeownership. A central part of wealth building is home equity, and it is often a significant contributor to net worth.

But real estate is much more than simple homeownership and can now be incorporated by investors as part of a diversified portfolio. The asset class was historically used by the ultra-wealthy, but over the last 50+ years, new structures have made it possible for more investors to gain access to real estate investments. Today, technology has enabled new ways to invest, such as participating in digital platforms that enable crowd-sourced investing.

In this piece, we’ll dive into the different types of real estate and discuss why they may be attractive.

1. Commercial Real Estate

Whether it’s your favorite shopping mall in the Midwest, your local CVS, or that luxury store in Manhattan – commercial real estate is integrated into our everyday lives. It’s estimated that the size of the U.S. commercial real estate market size is $1.1 trillion.1

Source: Ibis Worldwide, Commercial Real Estate in the U.S. – Market Size 2004–2022

Businesses and sophisticated investors often access opportunities through large deals (tens of millions and up), but the investment rationale is the same as it is for the residential market: the potential for capital appreciation and consistent income.

Commercial real estate is generally considered to be real estate used for business purposes, including office space, retail space, malls, hospitality property, parking lots, movie theatres, gas stations, and more.

The past two years have changed the way commercial real estate is viewed as an opportunity, putting more pressure on the industry’s future. This is mainly due to three major trends: Technology adoption, hybrid work environments, and the eCommerce shopping experience.

Although the future potential could be dependent on these trends, there may be opportunities ahead for commercial real estate investors.

2. Residential Real Estate

The trends shaping the growth of the residential market – millennials moving out of big cities, hybrid-work, technology adoption – have the potential to be long-term in nature.

Source:. U.S. Census Bureau, International Data Base (IDB), as of September 2020.

Source: U.S. Census Bureau: Population Estimates, as of September 2020.

That said, there are many different types of residential real estate, including owner-occupied single-family homes, single-family rentals, condominiums/townhomes, cooperatives (Co-ops), mobile and boat homes, and duplex and triplexes.

3. Industrial Real Estate

Industrial real estate is not too dissimilar from commercial real estate, but it’s primarily broken out into a different category due to the use cases. Industrial real estate generally includes manufacturing and production facilities, storage warehouses, research and development, power plants, and data centers.

Industrial differs from commercial in the following way:

Office and retail buildings are largely service-oriented, so the layout, infrastructure, and details are focused on floor plans, location, and allowing for a business or shopping experience.

Industrial buildings focus on manufacturing, distribution, and logistics – so the design is centered more around size and functionality, and design and location become less important to the investor.

Across the United States alone, 593 million square feet of industrial space is currently under construction, up 22% from the tally just prior to the pandemic.2 With the growth in eCommerce and cloud computing, industrial real estate has continued to see growth through the pandemic.

How Can Investors Invest in Real Estate?

There are several ways investors can get involved in real estate, but the two most common are:

Direct Investment: This is essentially purchasing a property outright or joining with others to purchase a property or properties in a partnership framework. Investing directly has the potential for rental income and capital appreciation.

REITs: A Real Estate Investment Trust (REIT) REIT is a manager that owns, operates, or finances real estate or real estate-related assets. REITs combine the capital of numerous investors, allowing for lower investment minimums.

The Risks Investors Need to Know

Any investor should carefully consider the risks associated with investing, whether the strategy suits your investment requirements, and whether you have sufficient resources to bear any losses which may result from an investment. There are a few common to real estate:

Market Risk – The strategy is subject to normal market fluctuations and the risks associated with investing in markets. Therefore the value of your investment and the income from it may rise as well as fall, and you may not get back the amount originally invested.

Property Risk – Property is a specialized sector that may be less liquid and produce more volatile performance than an investment in other investment sectors. The value of capital and income will fluctuate as property values and rental income rise and fall. The valuation of property is generally a matter of valuers’ opinion rather than fact. The amount raised when a property is sold may be less than the valuation.

Liquidity Risk – Any investment may make investments or hold positions in markets that are volatile, and which may become illiquid. Timely and cost-efficient sale of positions can be impaired by decreased demand and/or increased price volatility.

The Bottom Line

Real estate is a large marketplace with many ways for investors to integrate it into their portfolios. Understanding the potential opportunity and the risks, as well as a specific investor’s goals and objectives is important to consider before investing.

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