Now I know this is a question that does not necessarily have a correct answer however I would be curious to hear what everyone thinks is the "best" property type. Assuming you can only develop an expertise in one property type and that will be your niche for the rest of your career what would you choose and why?
For example I have experience with Office (CBD & Suburban) and Industrial. Part of me has a strong desire to get involved in retail because the dynamics of the tenants are interesting to me and if I was ever to make investments with my personal money for most people CBD office will be out of reach however retail/multi-family might be more realistic.
A wife.
This is a hilarious answer, but also a terrible answer. Talk about a depreciating asset. You can only do so much reno work to keep it modern and costs skyrocket in line with your income.
Way too much TI/Cap Exp.
Multifam. People always will need a place to live.
Answer: whatever gives you the best return.
I may not have posed this questions well. If you are buying CRE obviously the best return is the best option however I am saying if you are forced to focus on a single property type for the remainder of your career....which one would you choose and why?
If your goal is to make the most $$$, then @CRE is right. If your goal is (relative) ease of management/as passive income as possible, I would argue it would be either MF or IND depending on a couple of different things.
Resi and office. Live and work son. Also industrial in the right place. Depends on the location. The bigger the deal the more money.
Oh, probably multifamily like cre123 said then. I have the most experience in it. Office would be #2. Don't have any retail experience.
I will say this though - I think there are really cool, incredibly niche markets out there. I know a guy who is the vp of development for a healthcare REIT and his job/company is incredible. They more or less buy buildings and land from hospitals and then lease it back to the hospitals indefinitely. Something like that - gaming the system - would be cool if you can find it.
Healthcare Realty Trust
I argue this a lot with people and my answer is senior housing for two reasons.
Demographic shift in the United States for Baby Boomers Aging.
It is the only real estate product in my opinion that is not directly linked to job/business growth in a particular city. All other product types: multi-family, office, industrial & retail rely on new jobs/businesses to bolster their returns.
Yes, but most senior housing is located within those markets regardless.
I like the demographics behind senior housing. Though when you look at incomes behind the 10k people a day that turn 65 the demand pool gets a lot smaller. Several other thoughts come to mind when I think about this niche. 1) The grey area (given regulatory differences) between assisted living and traditional Market Rate product and what your going to run the deal as. 2) You haven't seen development pick up as much for senior because many large capital partners have extremely stringent demographic requirements.
Doesn’t the politics of healthcare and rapidly changing insurance market serve as headwinds For some of the more intensive care types?
Yes - the more Medicaid residents there are, the less attractive the deal is to investors. Lenders will sometimes require a years worth of debt service to be held in reserve up front for deals with a high % of Medicaid tenants. Medicaid could stop covering these types of services in an instant if the right laws get passed, so that’s why people are worried.
I’m not sure how changes in the private insurance world will affect seniors. Insurance rates will probably go up for some people with the Obamacare individual mandate repealed, but that’s not specific to seniors
For a run of the mill investor I'd agree multi fam is the way to go. Easiest to find tenants and much less complicated leases and docs than office/industrial/retail. I do agree with CRE about the niche markets of commercial real estate. If you can specialize in one unique product type and the industry (brokers and users) know you do a good job with this product then you will have a steady supply of people to bring you deals and fill up your spaces. Tech spaces and healthcare are solid specialized product.
Senior Housing is interesting for the above reasons, but I think Industrial i think it's always going to be around.
While true, 18' clear heights on industrial buildings become functionally obsolent as do things like corian counters in MF units.
The biggest difference IMO is that going from corian to granite in an apartment is much easier than going from 18' to 36' clear in an old industrial building
See this is it about real estate. Retail is not going to go away right now, but there is going to be a shift in the Highest and Best use of the product, for apartments, the return happens when you put in Granite counter tops. Someone is going to come up with the same solution to retail, but who knows how it will happen. The same will happen to industrial office ect. it is just how the market works.
With the exception of smaller niche areas like storage or seniors, I would say that if you had to pick one product type for the rest of your life, to pursue industrial or apartments. People can work from home, they don't have to have an office. And as for retail, again, there's a lot of retail out there that is not necessity-based or that can easily be ordered online. I'm not saying retail is dumb or office is dumb, but you asked for us to choose one for the rest of our lives.
Cool thread, by the way, CREPATH
SB +1
I would say multifamily if I had a gun to my head and had to chose for the rest of my career.
In real life though from a learning perspective and career wise I think office is probably the best. If you underwrite or asset manage office buildings and that's all you did for 5-10 years you could learn the other property types very easily later on. On the flip side if all you did was underwrite or asset manage multifamily for 5-10 years it would be a much steeper learning curve if you switched to another food group.
Urban retail. Sexy buildings and locations, get to know all the restaurant / bar operators, bigger focus on each tenant's business, overall less vanilla than multi and office.
Bless your heart, but a lot of that, like what Dingdong08 said, is why I would never do retail. Some of the best restaurants are the worst at paying their bills, "less vanilla" sounds a lot like "less predictable," etc.
Yeah, sexy in RE is generally a bad thing. Some of the individual guys I know who have made the most in RE (outside of the big PE guys or billionaire types, more like the local guys who have made a ton) invest in the least sexy class B multifamily or have gotten really good at building the least sexy industrial buildings.
I had a mentor when I was first out of college whose saying was "Never fall in love with a building because you can never fuck it but it can fuck you."
Certainly true and it's reflected in cap rates. In regard to brick and mortar retail becoming obsolete, big-box is going the way of the dodo, but big cities are always going to need fly traps for tourists, and coffee shops, nail / hair salons, restaurants, etc... for its local residents.
Exactly. Restaurants are HORRIBLE tenants, by and large. Nothing "sexy" about a tenant that defaults on its lease.
If you want to break out on your own and aren't well funded multifamily's the easiest because you can scale it and as others have said, the leases are simple, you don't really have to underwrite t/i's to a tenant's credit (or lack of) or have the capital available to attract decent tenants through t/i $'s and brokerage fees. The short term nature of the leases and ability to acquire more units at a lesser cost/unit means that you can mitigate the risk of having large blocks of vacant space for extended periods and getting a new tenant isn't a multi-month process like it is for office or industrial.
I like industrial because you avoid most of the above but to get good industrial properties as opposed to crappy B/C stuff it costs a lot of money. And when you dip into B/C props in office or industrial you're attracting a lower quality tenant and have to deal with them.
I hate retail personally. It has changed and continues to change so much with regard to online shopping that it's just a really risky proposition to buy properties that my be unused in the future. If you go back 10-15 years there were very desirable tenants who are now out of business or pretty shaky and back then you never would have thought it possible (think CompUSA, Linen's n Things, and even Best Buy, even though they're still operating-they were all super desirable tenants not too long before they went under). When you get into lower retail you're also dealing with a lot of mom and pop stores and it's a bitch to deal with them. Buy a strip mall and yes you may get a good anchor like CVS or a grocery store, but you're also going to have the nail beauty salon and other dipshit one off shops that are a headache. Urban retail may seem sexy but one off restaurants are some of the worst tenants you could ever have. Yes, you may be able to get reservation at the hottest place in town but half your tenants won't be up to date on rent and depending on the city making exterior renovations can nearly take an act of Congress and you may end up with union issues.
Specialty RE like senior housing or HC is great but it's pretty institutional now so I don't know how much room there is for entrepreneurial activity.
If you're staying in the institutional shops, just pick what you like. In my opinion if you want to do things on your own or with a small group of people in the future, multi-family is the path of least resistance.
Sexy in RE is not a bad thing if you expand your time horizon beyond a couple of years. Owners of sexy buildings in major cities get bent over the least in bad times and experience the highest rent growth during good times. Just go compare the change in asset prices of high street retail vs. class B multi over the last 20 years.
"Owners of sexy buildings get bent over the least in bad times"? That's assuming the building is stabilized and you didn't overpay. Does the GM building ring a bell? If not, it seems like you need to read up on Mr. Macklowe. Best asset in America (if not the world) screwed him over. Ever wonder why the larger REPE firms who owned Class A office in major cities disappeared? Hint: they got bent over...
Not exactly sure what firms you're referring to, but last I checked Blackstone, JP RE, MS RE, Kilroy, Clarion, CPP, Bentall Kennedy, Boston Properties, Irvine Company, etc... are definitely still around.
I just don't get your point. Everyone got killed in the financial crisis (which I alluded to in my previous comment), but urban, high-barrier to entry product rebounded on a $ psf basis much quicker than suburban across all product types. Urban stuff keeps setting new records with each transaction (and has been for a solid year and a half), but class B stuff in the burbs is just getting back to pre-recession highs.
Macklowe, would've made money on GM if he wasn't over leveraged, and in that portfolio deal. He literally defaulted on an asset that 3x in price while he owned it because he couldn't get financing. That and Jonathan Gray worked him.
Multifamily - The darling child of CRE for the past few years. Office - Lumpy Cash Flows Retail - Dependent on consumer spending. Same fundamental story helping MF hurts Retail. Industrial - I don't know ship about this asset class.
Gotta dig deeper than just a single asset class. The same buffet principal that applies to investing apply to CRE asset classes as well, stick to what you know.
I work for a company that develops, invests in, and owns and operates hotels, retail, office, and multifamily all in the same market. I've gotta say that they think the best property type is multifamily, hands down, and they HATE hotels. The owning/operating of retail is a nightmare--the vast majority of tenants have sh*t financials, turnover is huge, and realizing economies of scale for management is difficult. Multifamily suffers from much less volatility, is much more straightforward, and (at least in our market) is always, always, always in demand, regardless of the economy. Our market has 30% office vacancy rate and 4% annual rent growth rate for multifamily units with 3-5% vacancy.
So if you want to avoid the unemployment line, I'd go with multifamily.
Given your name, I assume that you are in DC. If true, where are you seeing 4% rent growth in multifamily? Just curious
Our B and B+ units in Arlington, VA. Looking at an analysis done 2 years ago, our rent increased 4.56% per year at one of our Arlington properties from 1984 through 2012. Rents finally fell 1.5% in 2013 only to recover by 7.5% in 2014.
In fairness, rents have been increasing at a steady clip in office and retail, as well. But managing retail is a nightmare and office is being killed by vacancy.
I would like to have multifamily, Office for an easy Cash Flows, retail that will be dependent on consumer spending and industrial. That would be all.
[quote=laurawhite]I would like to have multifamily, Office for an easy Cash Flows, retail that will be dependent on consumer spending and
well there are not any specific criteria which exactly tells which property is best. But many people considers commercial property as safe and secure for investment because it returns good rental income.
This is perhaps one of the most thorough/thought provoking descriptions of an asset type and CRE overall.
LOL SB 1 year later
Mid to high quality Mobile home parks(land lease). all the benefits of standard multifamily, less of the maintenance, and better tenants.
High-quality mobile home parks, particularly coastal, are a phenomenal investment. As municipalities keep raising property taxes, more and more retirees will opt out of home ownership.
The most successful guys that I personally know are doing industrial deals.. Industrial warehouse with office space lease ups or build to suit
Sexiest RE Property Type? (Originally Posted: 02/27/2014)
What are your favorite property types to underwrite?
I have underwritten Office, Retail, and Residential thus far. Residential has been my favorite, due to the quick lease-ups, allowing fairly quick reposition strategies.
What are your thoughts?
Sexiest and safest are two different things. Sexiest is probably hotel, but carries the most risk. Safest is multifamily. That's why you see pension and insurance companies pouring their money into large apartment buildings.
The "sexiest" is probably defined as the property type with the most upside. However, I enjoy underwriting urban, Class A+, multifamily and "trophy" office assets as they have the most appealing interior finishes. Typically makes for a fun if not interesting site visit. This is an ambiguous questions though.
The "sexiest" properties are Class A office properties in prestigious neighborhoods/submarkets or hotels in prestigious areas. My favorite type of deal to underwrite is residential subdivision since it takes an enormous amount of judgment and market knowledge and because the structure of those deals is often super complicated--proper loan structuring can make an identical project either outrageously risky or very low risk.
For me, Class A office in Bethesda, MD is just too vanilla. I like a challenge. However, completing any transaction in, say, NYC, D.C., or Chicago can be a bear just because of the legalized corruption. I didn't think my opinion of the D.C. government could be any lower until I learned about their "permit expediter" process.
This
Sexiest are Class A trophy assets in the hottest markets - lots of NYC office (i.e. 1095 Ave of A, GM building, etc). I personally enjoy institutional type portfolio underwriting of industrial, retail, or office since the modeling is much more complex. Also, development deals for luxury-residential are cool - crazy to see people paying $100+psf to rent an apt in NYC
Luxury residential, ideally in emerging markets.
I have found the sexiest properties to be the ones that are packaged correctly. More specifically, when the sales broker provides an exorbitant amount of pretty pictures, area demographic, and employment information, with little to no information on the historical financial performance of the property.
Also, when their pro-forma takes occupancy from 30% to 95% in one year at above market rent rates. THAT is sexy!
Lol proformas are jokes. I can't take some brokers seriously after i read some of their memorandums. I remember seeing one office building, where the broker's proforma showed a conversion of the parking lot to additional office space. This was a class A building, it was freaken hilarious. Proforma revenue doubled in year 2 which suggested a 15% cap rate at stabilized value. LOL
Strip clubs and MHPs. Preferably not in the immediate vicinity of each other.
Agree with Slothrop, MHPs deliver killer returns.
Luxury and lifestyle hotels
Bought an amusement park one time. That was quite sexy.
HIG Capital just bought the nurburgring!
Personally I think it's Class A Office or Urban Storefront Retail (aka High Street) in prestigious locations (Think Rodeo Drive in Beverly Hills or the General Motors Building in NYC.
Two different product types but both are sexy. I especially love Storefront Retail or Mixed-Used with a retail component on the ground floor.
Industrial. Ha ha. Hotels and retail. Luxury type projects are fun.
Hey keep paying 2% caps for "sexy" trophy product, I'm ok with 20% COC from trailer parks.
I agree. Most of the sexy stuff is vanilla. I guess it's prestigious, but so is the bonus from playing around in the dirt.
Clearly the answer is hotels.
Nothing can beat luxury residential
Industrial. From my experience as a commercial agent, industrial clients know what, where, and how much when it comes to their search for a location. No BS from a guy looking for 20K SF of warehouse. Functionality is the name of the game with the salt of the earth industrial types and it makes deals that much easier to get done.
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