The Azucena Take: The 20-Year Outlook for Investment Real Estate
One fact we always tell every investor (be it seasoned or new) is that commercial real estate is a long-term investment. This is important because investors will always make the mistake of being too focused on what is happening now instead of what could be happening in the next 6 months to a year. This was especially true in 2020 when every broker had to work with an investor who was ready to make a knee-jerk reaction in response to the pandemic.
Nothing stays the same forever and the world is always changing. As to quote Luo Guanzhong, "Unity succeeds division and division follows unity. One is bound to be replaced by the other after a long span of time. This is the way with things in the world". That is why no matter how bad things are now, investors should be looking at the future.
Take for example investing in multifamily properties 20 years ago compared to now. Between 2001 to 2007, the average value of a multifamily unit peaked at $95K per unit while the average rent hit $950 a month by 2007.
When the 2008 crash hit, multifamily properties lost part of their value right away and would not recover until 2013. In theory, investors who entered the market during the peak lost money when the recession hit. In reality; they actually profited from their investment (via rent). Despite the market crash, the average rent continued to rise up to $1,000 and only took a minor dip back to $950 in 2009. That dip was short lived as by 2010 it had passed the $1,000 threshold and was over $1,200 by 2014.
By 2021, the average value of a multifamily property is $230K per unit while the average rent is $1,600 a month.
Now let's examine a return on investments based on asset classes. If one were to invest in the S&P 500 back in 2001, they will have a return of 416% by 2021. However; if one had invested in multifamily and retail properties, they would have a return of 458% and 461% by 2021. This pales compared to the return of 848% from investments in industrial properties.
Instead of looking at the headlines, what should investors be focused on? The answer are demographics. Populations changes happen as time passes and groups once lacking in capital are going to be financially influential 20 years later.
The big takeaway for investors should be not to hyper-focus on what is happening now but instead, be looking to the future. The pandemic did not last forever, inflation is not going to last forever, a recession could happen while demographics and markets change. That is why investors need to ignore the click-bait from trash tier outlets and actually talk to a professional advisor.
The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap