Generating CRE Wealth in Uncertain Times

Jonathan Hipp

Commercial real estate has played an intriguing role in the economic conditions of the past two years. There is an old popular song that proclaims, “We’re in the money.” The lyrics are really a statement of irony since it was written and performed during the Great Depression of almost a century ago.

History seems to be repeating itself. We have just survived one of the most severe downturns in modern memory. And yet, current market conditions are leading to an explosion of interest in commercial real estate as more potential investors seek greater wealth, or at the very least, more long-term financial security. 

This downturn was not just one of the worst. It was probably the most shocking in that COVID-19 ended, virtually overnight, the longest run-up in economic fortunes also in memory. The irony here is that in that time, while many of us were dealing with personal and business losses, more millionaires were forged while billionaires got even richer. 

Reportedly, there were more than 5 million millionaires created globally during the downturn while billionaire wealth in the U.S. grew by more than 60 percent. There were many drivers of this increase in economic standing, from collectibles and cars to commodities and even platinum. But sources report the No. 1 driver of this added wealth was real assets, including commercial real estate, and a record number of investments in this sector were hammered out last year. 

We fully expect this trend to continue as the economy continues, if haltingly, to improve. Threats of inflation and interest rate hikes might deter certain investors. But wise participants are pricing in the risk and choosing their plays with care. 

Not Just the Wealthy

They understand that, while certain sectors have suffered severe losses, others have picked up the slack. We’ve seen traditional office and retail investors dip their collective toes in the waters of industrial or the ever-stable medical office market. We are clearly bullish, particularly on the net lease sector and the benefits it brings, especially if the focus is on well-researched guaranteed performers, such as dollar stores and pharmacies. 

But this is not a time solely for wealthy investors to get still wealthier. A greater number of potential investors are also finding paths to new wealth through smaller private offerings. Such structures as DSTs (Delaware Statutory Trust) allow for entry-level players to pool investment dollars, especially in 1031 exchanges and assets such as net-leased properties that require little leasing and management expertise.

Of course, every investment demands thorough research and the input of tax and legal advisors. The market’s successful investors got that way specifically because of the expertise they brought to the table. 

Yes, the past two years were unprecedented for the distress they brought. But, ironically, they were unprecedented as well for the wealth they produced. As we swing into a new economic cycle, we fully expect more wealth to sprout from the safe haven of well-chosen real estate investments. 

Soon more people might well be singing, “We’re in the money.”