We’re living in an era of perpetual change. The past few decades have seen the rise of technology that has redefined industries, including the investment world. Historic events in the market have prompted new legislation, innovative ways of thinking around how we invest and how we prevent catastrophe. Even today, the markets, in particular, are in a state of flux. On the heels of the cumulative change of recent years, industrial and logistics properties are seeing incredible growth, driven largely by overarching trends in the economy and related to the rise of e-commerce. At the same time, some retail, restaurant and hospitality properties are experiencing pullbacks and a cloudy regulatory forecast — all to the backdrop of what could be a sustained pullback for at least the next few quarters.
Tapping into the discipline to stop and ensure we don’t miss the forest for the trees can be a challenge, particularly where finances are concerned. But it is possible to find confidence in your plan and portfolio with the right perspective. Whether you are building your portfolio for the first time or are a seasoned investor, moments of potential challenge present a prime opportunity to assess your portfolio and ensure you’ve done all you can to help your wealth survive — or ideally thrive — during periods of economic uncertainty.
One way to accomplish that is to ensure that you have a properly diversified portfolio, with ideal tax considerations, and a strong underlying foundation of hard-asset value. There aren't a ton of asset classes that can check all of those boxes, but we'd like to suggest there is at least one — commercial real estate.
Why Diversify with Real Estate?
Maintaining a diverse portfolio is investing 101. It's absolutely critical for a successful long-term growth strategy. This evergreen best practice is never more beneficial to those who follow it than it is in times of turmoil. Most investors recognize this fact and make some attempt to diversify their holdings, at least within their preferred asset class. Someone might invest in a wide range of equities, holding stock in Amazon and Alphabet in addition to John Deere and Johnson & Johnson.
But in an era of persistent transformation, that's not enough. A truly diversified strategy requires the holding of assets across classes rather than simply choosing sectors within an asset class. Alongside your standard asset classes of stocks and bonds, there are a number of reasons why commercial real estate makes a good addition to a well-balanced portfolio.
Compared to stocks, real estate is unique in that it is extremely rare that a real estate investment without leverage could ever lose all its value — this is because the investment is backed by a hard, physical asset which has inherent value, and even in the worst of times economically, provided that it is not overleveraged, it can usually be sold and recover at least some of a potential total loss. In addition to capitalizing on real estate’s hard asset store of value, investors can target specific property types to reduce their exposure to economic downturns. For instance, someone might choose to invest in buildings in property types, such as third-party logistics and warehouses, that may experience growth in the coming years even while other property types may be still recovering. There are many other important aspects of commercial real estate to consider including diversification, including geography, lease lengths and terms, tenant credit, etc.
Portfolio diversification is an excellent benefit, but as a rational investor, you want to maximize return on your investment — as you should. So, why else should you add commercial real estate assets to your portfolio? Many investors consider real estate among the most tax-advantaged investment assets. Others favor real estate as a regular source of durable income, as well as the potential for appreciation.
It's important to note that investing in real estate — as with any other investment — also comes with potential risks that you should consider. If, for example, you’re considering directly purchasing a commercial property intending to rent it out to local businesses, you may experience long periods of high vacancy if certain sectors of the economy struggle or an unexpected issue, like burst pipes or tenant-inflicted damage, requires an investment of time and money before you may find renters and see returns. If direct property ownership might be too much to take on, you can still add commercial real estate to your portfolio through a real estate investment trust (REIT). While these investment vehicles allow you to start with smaller initial amounts and help diversify your investment across multiple commercial properties, many come with high fees that can eat away any potential returns. Regardless of which option is best for your unique situation, it’s important to fully weigh the potential risks just as heavily as you’re weighing the potential returns on any investment.
The Last Word
John Stuart Mill, the 19th-century economist who first found the words to describe many facets of our current economic system, once stated: “Landlords grow rich in their sleep." While there are no shortcuts to success, and no substitutes for prudent and risk-aware investing, the use of real estate in a balanced portfolio has the potential to defend and grow your wealth at the same time.
This information does not constitute investment, tax, financial or legal advice. Investors should consult their tax professionals for more information about potential tax benefits.
The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.