Fisher Investments is a well-known investment management company in the US. Recently, they published an insightful analysis on the risks of commercial real estate investments. With the volatile global economic situation, investors need to pay more attention to the downside risks when allocating funds into commercial properties.
High leverage leads to higher risks for commercial real estate investors
Many commercial properties are financed through mortgages and loans. However, high leverage will amplify risks during economic downturns. Once rental income drops or property prices decline, highly leveraged investors can face margin calls and be forced to sell at a loss.
Illiquidity can prevent investors from rebalancing their portfolios
Commercial real estate assets are much less liquid compared to stocks and bonds. Investors often have to holding their properties for months in order to find buyers. This illiquidity prevents them from promptly adjusting their investment allocations when necessary.
Management risks are higher for commercial real estate investments
Not all investors have the expertise to manage commercial properties efficiently. Issues like vacancies, tenant disputes and maintenance can quickly eat into profits if not handled properly. Investors need to factor in these management risks.
Economic trends will impact commercial property fundamentals
Factors like business activities, employment and interest rates will influence demand for retail, office and industrial spaces for rental or sales. Investors need to closely track economic trends to avoid oversupply and falling occupancy rates which can lead to plunging incomes.
In conclusion, Fisher Investments pointed out major risks like leverage, illiquidity, management expertise and economic fundamentals that investors should consider when allocating capital into commercial real estate.