February 21, 2024

The ongoing threat of a national recession coupled with persistently high interest rates could present some serious challenges for the commercial real estate industry in 2023. Despite this uncertainty, real estate remains in the spotlight for investors, who have committed record amounts of money. In the past two years, capital has entered commercial real estate.

david wieland

David Wieland is the founder and CEO of Realized, an Austin, Texas-based real estate wealth technology firm specializing in investment real estate wealth management.

These issues may also be why high-net-worth individuals, accredited investors, and wealth managers seeking alternative income streams not directly related to public equity markets are embracing portfolio diversification and rebalancing.In its 2023 report, CBRE reported that investors poured $717 billion into commercial real estate last year, a record second only to the $835 billion invested in 2021 US real estate market outlook.

That compares with just $80 billion in commercial real estate investment in 2009, when much of the country was still struggling to emerge from the financial crisis, the commercial real estate and investment services firm reported.

As we continue to navigate financial uncertainty, I predict we will see more wealth managers and their clients add fractional ownership of commercial real estate to portfolios as a means of seeking passive returns and more stable income.

These investments may involve high risks and are therefore not suitable for every investor. However, those who do see fit can combine these passive commercial real estate investments with more traditional wealth accumulation and retirement vehicles such as 401(k)s and IRAs or other equity portfolios.

Even if the country does experience a full-blown recession this year, the hit is not expected to be as severe as past recessions, the CBRE report said. The high cost of capital puts off some investors, but leaves plenty of opportunity for investors who can quickly deploy investment capital into commercial real estate. Total commercial real estate investment is expected to be flat through 2023, but remains well above pre-pandemic levels, CBRE said.

DST keeps increasing
Passive real estate investing, such as buy fractional shares The purpose of a Delaware statutory trust is to generate passive returns with the goal of a steady income.

The number of DSTs established in Delaware increased by 30% between 2019 and 2021, according to Salt Lake City research firm Mountain Dell Consulting. This increase was mainly due to investors buying part of DST’s shares to complete its business. 1031 exchange. MDC reports that Delaware’s statutory trust market will raise more than $9.2 billion in equity in 2022.

Baby boomers are probably the main reason why this sub-sector of commercial real estate continues to experience exponential growth. As the population ages, many are deciding to end the cycle of “tenants, trash and toilets” by exchanging actively managed assets for passive real estate investments.

Purchasing a fractional share of DST allows investors selling high-appreciation investment properties to purchase the exact number of shares needed to meet their 1031 conversion requirements, defers capital gains taxes and depreciation recapture taxes, and offers the potential for steady cash flow without administrative hassle .

The pre-packaged nature of DST investments may be another factor in its meteoric rise as a viable alternative asset to 1031 exchanges. Investors must adhere to strict deadlines when making an exchange – identifying a replacement property within 45 days of the close of the sale of the property they are abandoning and a total of 180 days to complete the replacement asset. Finding and closing on a suitable replacement property in such a compressed time frame can be extremely challenging for investors, especially in a real estate market where strong investor demand leaves exchange buyers with few options.

DST can eliminate deadline pressure because financing, due diligence and other important considerations are already in place. Exchanging to DST reduces execution risk for all types of 1031 exchanges. Investors can even mix and match stocks with different DSTs to suit their risk tolerance and meet their portfolio diversification or rebalancing requirements.

Investors have a wide range of passive investment opportunities to choose from, and they may find that not all commercial real estate is office space, industrial buildings or flashy retail centers. A third-party managed storage facility in the Midwest, as well as a multi-family apartment complex in the South, might constitute an appropriate real estate portfolio to achieve its goals. These and many similar products can be found as assets held in DST.

Technological advances and predictive data analytics
Technology can also help investors and money managers rebalance and diversify their portfolios, including highly customized commercial real estate products. Institutional-grade forecasting and forecasting technologies brought to market for investors and wealth advisors are very powerful tools. Predictive data analytics can help investors tailor their commercial real estate holdings so that their portfolios better align with their risk tolerance and diversification requirements.

The insights underlying commercial real estate market data analysis can give you a clearer picture of tenant and consumer trends, as well as trends including key property amenities, neighborhood demographics and growth patterns. Armed with this data, investors and wealth managers can identify commercial real estate investment opportunities that suit each individual’s risk tolerance and investment goals.

tax deferral strategy
Finally, investors who convert an actively managed investment property into a passive real estate investment vehicle can also roll over capital gains through subsequent exchanges and continue to pursue potentially higher-value commercial investment properties. The ultimate sanctuary of tax-deferred strategies should include bequeathing your real estate assets to your heirs so they can enjoy a one-time tax-plus basis, potentially eliminating all of those deferred capital gains taxes.