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Fargo. As I meet with our clients, I find that more and more of you are asking me whether
it is a good time to make new commercial real estate investments.
And, some of you are concerned about the potential for rising interest rates and recent price
increases in hot markets such as the San Francisco Bay Area, New York, and Houston.
What does this mean for return and ongoing performance in the future? And will interest
rates go up so much as to negatively impact value?
We believe that while interest rates are likely to rise in the future, the economy seems strong
enough for commercial real estate investments to continue to be a potentially attractive
proposition. Real estate performance is tied to job growth
and the economy, which are demand drivers for commercial space and both of which are
continuing to improve. And this should keep supply and demand for
commercial space in balance.
However, at this point in the commercial real estate investment cycle, investors do need
to be careful about the types of assets they consider and less experienced investors may
want to seek professional help.
In our view, diversification of a property portfolio is a key contributor to investment
success in this market environment. Just as you would diversify your other investments,
the same holds true for real estate portfolios. The following diversification steps should
1. Diversify across markets - Many clients like to invest in real estate that they are
familiar with in their own local market. But think about the parallel to equities; would
you only invest in local companies with which you are familiar?
No. And, the same applies to real estate investing. Geographic diversification is a very good
thing for an investors' real estate portfolio. However, do take into consideration the location
and the potential risks if you're not familiar with the area.
2. Diversify across asset or product types - By diversifying the type of real estate
assets that you own, you may find yourself better positioned to ride out a soft patch
or downturn in any one commercial real estate sector or industry.
3. Diversify across tenants - Consider what the loss of any one tenant would mean to your
cash flow, your ability to service debt, and your overall financial plan. The broader your
tenant base, the less impact that the loss of any one tenant will potentially have.
Real estate investing can play an important role in a well-diversified investment portfolio.
At this point in the investment cycle, however, some degree of caution is warranted. The potential
for rising interest rates suggests that diversification of your real estate assets is likely to be
an important consideration in the future. For more information on this topic, download
our special report: A Tale of Hot Markets and Rising Rates.
You can also contact your Wells Fargo relationship manager to find out more.