Commercial real estate like shopping malls and multi-tenant office buildings have taken the brunt of the pandemic. At the same time, demand for industrial and warehouse space needed to serve rapidly-growing online commerce is surging. As is essential retail like grocery and home improvement centers, as well as apartments.
By design, the clients of SilverPeak Wealth are invested predominantly in the sectors of commercial real estate that are doing well during the pandemic. And we believe these areas will continue to offer opportunity for investors—especially in the current investment landscape of low bond yields and a stock market that is overvalued by historical standards.
SilverPeak Wealth uses predominantly two different non-traded REITs in client portfolios: Blackstone REIT (BREIT) and CIM Real Estate Income. The chart below reflects the approximate combined diversification across these two commercial real estate funds.
Our bullish outlook is not only because we feel our clients are well positioned within the commercial real estate space. We also believe real estate will benefit from the tailwinds that come from low interest rates, supply shortages, and the stated intention of the Federal Reserve to boost inflation in the broader economy. (Real estate, unlike bonds, has always been a good hedge against inflation.)
Falling Interest Rates
One of the most noticeable results of falling interest rates is that cash investments like money markets and savings accounts are back to earning roughly zero. (Savings rates have fallen to less than 0.1%.)
In addition, bond yields are also lower. Imagine, if an investor today buys a U.S. Treasury bond with a 30-year maturity, then that investor locks in a 1.39% return for 30 years. This is hardly inspiring from an investment-return point of view—especially given the Fed’s target of 2% inflation, and its statements that it is willing to let inflation rise above 2% before acting. In other words, long-term investors in Treasuries might not even keep up with inflation.
However, the other side of this coin is that borrowers—like those buying real estate—are enjoying a much lower cost of financing. Using a very simple example, if a landlord’s rent is constant, but the cost of financing the investment property falls, then the property owner’s profit goes up. And taking that a step further, if there are higher profits available, then the inherent value of investment properties will go up. This is what is meant by a “tailwind” pushing values higher.
Non-Traded REIT Investing: the history and the future.
SilverPeak Wealth believes strongly in the investment potential of our preferred non-traded REITs. But it should be noted that not all non-traded REITs are created equal. In fact, these investment vehicles have had a somewhat checkered past.
In the beginning, non-traded REITs were sold by brokers and charged very high commissions. Normally, a 7% commission to purchase a non-traded REIT was the rule. These high commissions lured brokers to recommend them to clients, but once investors were in, they were locked in with no opportunity to sell. Furthermore, the high commissions and high internal fees charged by these REITs meant investor returns were being largely siphoned away.
Cost-effective commercial real estate investing was reserved for only the large institutions and endowments. Then, roughly ten years ago, the democratization of commercial real estate investing began with sound, investor-friendly non-traded REITs. I was enthusiastic and fortunate to be on the vanguard of that movement.
Driven by demand from individual investors and fiduciary advisors like SilverPeak Wealth, highly respected managers like Blackstone and CIM Group (formerly Cole Capital) began to offer non-traded REITs to individual investors that provided investors and advisors with transparent structures, sophisticated real estate management expertise at a reasonable cost, easy liquidity for investors, and no commissions. Hallelujah!
With bond yields so low, we expect these high-quality non-traded REITs to continue to get more popular as investors and advisors look for alternatives to the traditional stock/bond portfolio. Our preferred non-traded REITs offer tax-advantaged yields between 5.25%-5.75%. These distributions occur monthly, which is especially important to retired investors living off their portfolios. And investors own the underlying real estate with its history of appreciation and the potential for future appreciation.
Finally, as their “non-traded” name suggests, these REITs do not trade on the stock market. Publicly-traded REITs that trade on the stock market have historically been just as volatile as other stocks, offering little in the way of meaningful diversification (i.e. when stocks are falling, publicly-traded REITs are likely falling as well.) Instead, our preferred non-traded REITs arrive at their net-asset-value share price through 3rd party appraisal of the properties held in the portfolio. This price is the same price at which investors can buy and sell. It is transparent, fair, and results in share prices that are much more stable than if the shares were traded on the public market.
In the current investment landscape of low bond yields and a U.S. stock market that is arguably overvalued, we believe our clients will be well served by including our preferred non-traded REITs in their investment portfolios.