Investing in commercial real estate (CRE) can be a sound strategy for diversifying a personal asset portfolio. CRE yields and growth can be more predictable than those offered in the equity and bond markets, for example, where trying to time buying and selling opportunities can seem more like wagering than investing.
It’s easier to invest in CRE than many investors think. Sure, commercial office buildings are valued in the tens of millions of dollars – but informed investors can have a stake in a property of that size by participating in a CRE investment syndication. In these arrangements, their money is pooled with that of other inve
stors, making each person a part-owner in the property with nearly all the tax advantages and opportunities for returns as the major CRE investors enjoy.
Now is the Time for CRE investing – Especially in Office Properties
Now is a good time to learn more about the syndication approach because there may be strong buying opportunities just around the corner in some sectors, including office properties.
Terry Painter, a prominent CRE expert and Forbes Council Member, has noted that commercial real estate markets tend to operate in approximate six-year cycles with four phases:
- The Recession Phase, in which investors initially hold on to their properties too long, but then quickly unload them when values decline significantly as the recession deepens.
- The Recovery Phase, when the recession begins to turn the corner and real estate prices are relatively low.
- The Expansion Phase, a seller’s market characterized by low vacancy rates and high rental prices. In spite of expanded construction activity during this period, good deals are hard to find.
- The Hyper-Supply Phase, where the market is saturated with properties and sales prices remain stubbornly high even while rents are declining. In this phase, markets are moving toward a recession.
A strong case can be made that in the closing weeks of 2022, we’re in the Recession Phase, with early stages of the Recovery Phase in sight for 2023. In other words, the market is softening right now, especially in the office property sector, with possible ideal buying opportunities right around the corner.
Getting into a Syndication During the Recovery Phase
That’s why this is a good time to check out the CRE syndication option.
CRE syndications are led by “sponsors,” usually CRE brokers or other professionals with experience in this area. The sponsors do all the legwork – identifying CRE investment opportunities, conducting due diligence, developing a business plan for maximizing the future value of a chosen property, and taking care of initial legal filings for the syndication (e.g., for the formation of the LLC).
With all that in place, the sponsor then builds their roster of limited partners, often kept to around 25 investors who can participate at the minimum specified level or more. The clock is usually ticking at this point since purchase contracts with the current owner/seller have likely been signed. This limited partner solicitation and capital commitment activity happens over a relatively short period of time – often not more than four to six weeks.
Financial Benefits for Investors in CRE Syndications
With the syndication in place, over the next several years, the sponsor will carry out the business plan to improve the value of the property via lease-up to new tenants, capital improvements, existing tenant lease extensions, rental rate increases, etc. When the time is right (e.g., the Expansion Phase), the sponsor will put the property on the market for resale. Investors share in the net proceeds of the sale according to their portion of the initial investment. It’s not unusual for a well-executed CRE value-add property syndication to yield a 2-3X equity multiple over the life of the syndication after selling the asset.
In the meantime, the syndication limited partners are likely to enjoy cash flow based on the rental income for the property. They’ll also share in the annual tax benefits accruing from the property, including deductions for property taxes, loan interest payments (if the syndication borrowed money to help finance the purchase), and depreciation.
A Final Thought
Don’t rush to write off the real estate office market in spite of media doomsayers’ rhetoric. Instead, remember Warren Buffet’s guidance to his investors, “…be fearful when others are greedy and to be greedy only when others are fearful.” There has been and will continue to be value in the right office CRE opportunity. And office CRE syndications are creating that opportunity for more and more investors every day.
In this blog, we’ve presented a high-level overview of how CRE syndications work. This isn’t meant to be taken as advice or a recommendation. Be sure to consult with your own attorney, real estate investment advisor, and your tax professional regarding these matters and take the time to learn more about how this investment opportunity might apply to your personal real estate strategy.