In the ever-changing market of highly sought after assets, commercial real estate (CRE) is a top contender. Fourth in line, to be exact. CRE joins the ranks behind stocks, bonds and cash.
According to an analysis in 2015 by NAOIP, the Commercial Real Estate Development Association, before 1980, CRE was relatively invisible. Now though, around 10 percent of investment portfolios are designated commercial. Commercial Realestate even survived the 2008 recession in which most real estate (residential real estate more specifically) took a massive hit, leaving many bankrupt, unemployed and eventually homeless.
So how did Commercial Real Estate become such a significant asset for investors?
Geographic Shift in CRE Investments
Between the 1990s and early 2000s, top-dollar real estate deals were domestic. It was either one investor or a partnership of multiple investors that were paying big dollars to purchase commercial real estate properties. There were few deals in the US made by foreign investors.
But move forward into the mid-2000s, the geographical shift began. It started in 2005 with the $705 million deal for the Central Midtown office tower on Park Avenue by Istithmar World, a Dubai-based investment company.
Continue to 2006, that another Park Avenue purchase almost doubled the Dubai deal. This time by a Middle Eastern company with the price tag of $1.2 billion. That same year, Hudson Waterfront Associates out of Asia bought an office tower for the same price.
The snowball effect continued for a couple of years. More foreign buyers were entering into the commercial real estate market in the United States, primarily in New York commercial real estate. Outside of New York, the majority of the deals stayed domestic, although there were some notable foreign purchases made.
Then Came 2008
By the time 2008 came (and with that the financial crisis that rocked the real estate world), foreign investments slowed down. No longer there billion-dollar deals between investors. They were more conservative and hesitant to buy into a market that just crashed in ways not seen since The Great Depression.
That slowly began to change. Then came 2011, when foreign buyers were slowly making their way back into the real estate game. This time, commercial-hungry Chinese investors led the way. Insurance corporations and investment companies in Singapore were some of the many foreign investors to get the ball rolling once again.
Back on the Rise
The commercial real estate market is on its way to seeing record-breaking deals being made. Those billion dollar deals will look like pennies compared to what is expected to come.
Why is commercial real estate becoming so popular again?
The popularity is largely in part to the high-yield returns. Even if the market is volatile, the gains, in the long run, are still relatively high, making it quite appealing to investors. With office buildings evolving to suit employee needs, and the rise of renting over buying, the commercial real estate market will continue to rise, with really no end in sight yet.