Demand for quality commercial real estate properties increased substantially in Fort Bend County in 2012 as investors sought to move cash into hard assets. Driven by projections of rising inflation and slow economic growth over upcoming years, competition for quality properties has been brisk. Investors are moving to commercial real estate as an alternative to investments which may be more susceptible to a devaluing dollar. Most commercial real estate leases contain rental escalation clauses which ensure that rents keep pace with inflation. Investors buy properties for their income streams and the potential for properties to appreciate in value due to those escalating income streams.
The two types of buyers of commercial property are investors and users. For the year or two following the 2008 recession, buyers in Fort Bend were almost exclusively “users”. Users purchase properties to utilize them for the operation of a business. When I am representing a "user" for the acquisition of property, I analyze the property as if he were an investor. The property should "stand on its own", capable of producing a fair return on investment if the owner chose to move or sell the business. Sometimes, however, this is difficult because the property may require alterations or improvements which are unique to the owner's business operation. These alterations could impact the rental value of the property for some companies interested in leasing.
Every investor's goals and objectives are different. A satisfactory level of income or profit to one investor may be entirely unacceptable to another. Although every commercial real estate investor is unique, they can be generally classified as either:
1. Individuals - Either a single person, a small group of individual investors, or small partnerships
2. Corporate Buyers - Public or private corporations, both profit and nonprofit
3. Institutional Buyers - Pension funds, insurance companies, foreign investors, or Real Estate Investment Trusts (REIT's)
With the advanced technology in today's economy, all three of these classes of investors commonly compete for commercial real estate investment opportunities. New forms of ownership, such as Tenants In Common (TIC’s), are making once untouchable commercial properties available to small investors. Tenants In Common participants own fractional shares in commercial real estate projects that were previously far too expensive for them to consider ownership.
Almost all investors have different criteria, goals and objectives. For example, a REIT may obtain its investment capital on Wall Street (by selling stock) at a much lower cost of funds than individuals or private corporations who use conventional mortgage financing to acquire real estate. With a lower cost of money, REIT’s are able to either achieve higher returns on a property or pay more for a property than investors using conventional sources of financing. Similarly, TIC’s are bringing new buyers to the market and are creating additional competition for properties, causing prices to push upwards for smaller to medium sized projects. Institutional investors have millions, even billions of dollars of capital to invest and typically do not consider smaller properties.
The strength of any investment portfolio lies in its diversification. Recently, local investors are looking to Fort Bend commercial real estate for that diversity. They are finding that not only are commercial real estate investments offering attractive returns, but that they can be a strong hedge against inflation and a rising interest rate environment.