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    What Can Commercial Real Estate Investors Learn From Past Recessions?

    It isn’t hard to recognize the impact of the last recession on the commercial real estate market. Many developers were left filing for bankruptcy, banks were empty-handed, foreclosed properties were a common sight, and many cities felt the economic impact of empty stores, restaurants, and shopping centers.

    However, the last recession is also reshaping the commercial real estate market and its practices in a positive way. With new knowledge, trends, and other banking and business changes, the commercial real estate industry can work to avoid another significant real estate crash by taking what we now know and applying it to future investments and transactions.

    Keep reading to learn what we can take from past recessions and how to practice innovative commercial real estate investing.

    Lessons Learned – from the Past for the Future

    The most significant factors that led to the last real estate crash were overconfidence in the market, a lack of caution in dealmaking, and poor business practices.

    Uneducated investors focused too much on growth and not enough on business fundamentals like risk management. High loan-to-value ratios exasperated this further as many people took on more debt in an economic downturn that they could not repay. Many people entered the real estate game late, trying to ride the bubble as the market had boomed in the years before, while others repeatedly refinanced loans to support their spending habits or increased expenses.

    Since many lenders, investors, and developers experienced setbacks after the last recession, this new CRE landscape has some difficult aspects. Tighter funding and increasingly cautious lenders have made the market challenging to navigate unless investors have significant assets, ample income, and a successful real estate history.

    To truly succeed in the commercial real estate market, investors must be thorough, knowledgeable about the market and practices, and extremely diligent in their property search and acquisition. As always, we recommend working with a broker who can help you determine beneficial investments and walk you through the process.

    Lenders & Buyers Exercise More Caution

    The last recession led buyers and lenders to exercise more caution when making commercial real estate transactions. Despite more significant profits and less strict loan standards, we saw many lenders fail after the exuberant total costs of loan defaults and foreclosures.

    There is a certain degree of risk to any investment, and commercial real estate is no different. After the last recession, many real estate developers lost their wealth after investing in a failed building project, and this was not lost on the average buyer or investor. As a result, many buyers are more cautious when getting involved with large-scale projects — and it’s always good to be cautious. However, we recommend having an expert broker on your team to help navigate any deal you consider.

    The Value of Multi-Purpose Real Estate

    While multifamily rentals have become more common in recent years, the number of multi-purpose developments has also trended upwards.

    Instead of being dependent on the neighborhood and its structure, developers are focusing on building entire communities for their tenants, with a borough-like feel. This results in more demand for housing and businesses in the area, as each property is not an independent asset but part of a growing, revitalized neighborhood. Many of these areas have become highly sought-after, as they are known for their eclectic feel, authentic restaurants, and a wide variety of stores.

    Many residential and suburban areas are developing quickly, as developers are creating office buildings, apartment complexes, townhouses, bars and restaurants, shopping centers, gyms, markets, drugstores, parks, and more. Instead of just following real estate trends, developers should focus on adding value to an area for long-term success. In other words, each additional development has the potential to help minimize investor risk by increasing property values in the whole area.

    The Investment Services You Need

    Our goal at Brisky Net Lease is to be your one-stop shop for all things commercial real estate investment. We know our way around the national CRE environment and can help you find the perfect property for your next investment.

    We put a lot of time and effort into underwriting, property evaluation, and education, keeping our clients informed and in tune throughout their investment journey.

    To learn more about the various CRE investment services we offer, get in touch with our team!

    Predictions from CRE Investors as Inflation Rises

    Inflation in the United States is currently at its highest level since the late 1980s. Commercial real estate (CRE) investors are keeping a close eye on this trend, as it has the potential to impact their portfolios in several ways.

    Marcus & Millichap’s recent investor survey suggests that while CRE transactions may level out this year, and investors are still optimistic about the future.

    Here are some of the key predictions from CRE investors on how inflation will affect various aspects of the industry: 

    Interest Rates Will Increase

    Rising inflation generally leads to higher interest rates. This is because the Federal Reserve typically raises rates when inflation rises to keep it in check. This can significantly impact CRE, as higher interest rates make it more expensive to finance property purchases and development projects.

    There Will Be More Pressure on Cap Rates

    Inflation can also lead to higher cap rates, as investors require a higher return to offset the increased cost of living. This is especially true when interest rates rise, making it more expensive to finance property purchases.

    Out of all investors surveyed, 14% predict that cap rates will rise by 50⁠—or more⁠—basis points in the next year. Approximately 35% think there’ll be a less significant increase, and 27% expect no change.

    Investors Are Split on Whether to Buy or Sell

    While some CRE investors are predicting that now is an excellent time to sell due to the current inflationary environment, others believe it’s an excellent time to buy.

    24% of respondents say they’d invest in less CRE, while 12% recommend buying more. Those who wish to purchase are pointing towards inflation-resistant properties like hotels, apartments, and self-storage units.

    Property Values Will Continue to Rise

    Many CRE investors believe inflation can benefit the real estate market despite the potential challenges.

    This is because inflationary pressure typically leads to economic growth, which results in more people working and earning higher incomes. As a result, there will be more demand for housing and commercial space.

    Rent Will Increase at a Slower Pace

    While property values are predicted to continue rising, the pace of rent growth is expected to slow. As interest rates go up, the cost of borrowing increases, making it more challenging for landlords to pass on these costs to tenants in the form of higher rents.

    What Does This Mean for Your Commercial Real Estate Investments?

    While inflation can negatively impact the CRE industry, investors are primarily bullish about how it will affect their portfolios.

    By being aware of the potential effects of inflation and adjusting their investment strategies accordingly, investors can help mitigate some of the risks associated with this economic time.

    If you’re a commercial real estate investor, staying up-to-date on inflation trends and how they might impact your portfolio is essential.

    Don’t hesitate to contact Brisky today if you have questions about how inflation may affect your CRE portfolio. Brisky Net Lease specializes in commercial real estate investments, and our team would be happy to offer guidance.