Is it better for an investor to rent or buy commercial real estate in 2016?
Investors looking at commercial real estate (CRE) this year and wondering whether to lease or buy should consider a few factors first.
And then, if they have the access to adequate capital, they should buy.
We’ll look at the reasons why in a bit, but first let’s look at why not to lease.
Little Upside to Leasing
Leasing in 2016 will be less attractive than in recent years. Vacancy rates for office, warehouse/industrial and retail space will stay low or drop this year, signifying a more competitive marketplace for commercial renters. Meanwhile, rental rates are expected to continue increasing, albeit at slower rates than in 2015, with the current year showing
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Moreover, by purchasing commercial property, an investor gains an asset that will continue to increase in value rather—better than a lease dragging on the bottom line. The Price is Right
In good news to potential buyers, economists expect real estate prices to, after a three-year period of extreme growth, slow down substantially beginning in 2016. For the first time since 2009 the Moody’s/RCA Commercial Property Price Index (CPPI) is dropping “below the long-term average growth rate of 5.8 %.” The CPPI will continue to grow “at very subdued and slowing rates”: 5 percent in 2016 (down from 12.7 percent in 2015), 2.7 percent in 2017, and 3 percent in 2018.
What this data shows is that not only is the moment ripe for buying CRE, but also that properties will continue to increase in value over the next couple of years, just more slowly. For an investor looking at a secure product with long-term potential, CRE is a vehicle with promise.
However, there are some reasons for investors to be cautious about purchasing.
Less Available Cash
Paralleling the drop in price growth, this year marks the first time since 2009 that the “issuance of commercial mortgage-backed securities (CMBS), a key source of funding for commercial real estate,” is decreasing, from $101 billion in 2015 sharply to $85 billion. However, the drop is only temporary, with issuance
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