17 Sep The Top-Performing CRE Sector Right Now
Office and hotel are next in line for top performance across the CRE sectors, providing a year-to-date return (as of June 30, 2019) of 6.08% for hotel, and 6.79% for office space. Vacancy rates are considerably higher for these two categories than other sectors according to the NAR CRE Market Survey, with office space having an average vacancy rate of 10.2% and hotel/hospitality at 12.6%. Multifamily developments such as apartments or student housing continue to be a highly sought after asset class for CRE investors. This is largely due to the current housing crisis, ever-increasing rental rates, and low vacancy rates. However, cap rates for these investments are aggressive, at an average cap rate of 6.2% and a year-to-date return of only 5.78%. It is important to determine the supply and demand for the CRE sector you are interested in investing in based on current supply and future development in that specific location to ensure supply will not outpace demand.
Options to invest in CRE by sector
By far the easiest way to start investing in the top-performing CRE sector, or any sector of CRE that you so choose, is through real estate investment trusts (REITs). A REIT is an investment company that acquires and manages commercial real estate by pooling investors’ money and placing it across multiple investments. Most REITs specialize in a specific asset class, such as industrial. Take a look at Millionacres’ top recommendations for industrial REITs.
Another option for investing in this asset class is through crowdfunding. If you are an accredited investor, you can invest in various CRE properties across all CRE sectors with as little as a few thousand dollars through a crowdfunding platform. These investments typically have more risk associated with them and require a substantial amount of due diligence to ensure the investment is worthwhile.
The most challenging way to potentially invest in the top-performing CRE sector is by actively investing and managing a property yourself. This is capital-, time-, and knowledge-intensive and often requires a substantial amount of commitment to learning the industry, research investment opportunities, then acquire and manage the asset. This avenue often can have higher returns than crowdfunding or REITs, but not without greater risk and commitment.
The macro performance of a sector is valuable information, but it doesn’t deliver a complete representation of the sector. While industrial is a top-performing CRE sector across the United States right now, that can change at any moment, especially on a micro level. There are a number of factors that affect each sector’s performance, most of which are due to the geographic location of the asset. Factors such as overdevelopment, decrease in demand, economic recession, a shift in population, or change in job and employment growth, can greatly alter the potential profitability of a sector in that specific area. If you want to invest in commercial real estate, it is imperative that you conduct your own due diligence on each sector’s performance in the targeted geographic location and determine if the return is worth the risk, value, and price of the investment.