The aftermath of the Great Recession brought significant changes to the landscape of Commercial Real Estate (CRE) investing. The commercial property market, which was once highly accessible to individual investors, became increasingly challenging to penetrate due to lenders' more stringent requirements.
In this blog post, we'll discuss the impact of the Great Recession on the CRE market, explore the challenges it created for newcomers, and discuss a viable solution: leveraging partnerships to break into CRE.
We will examine the benefits and drawbacks of real estate partnerships to help you make informed decisions in your commercial real estate investing career moving forward.
The Great Recession's Impact on Commercial Real Estate
To understand the magnitude of the challenge that emerged post-Great Recession, it's crucial to examine the impact of the economic downturn on commercial real estate markets.
The Great Recession, which began in 2008, led to a significant decline in property values, increased vacancy rates, and a general sense of instability in the real estate industry.
Like all business cycles, the recession swung lending policy in the opposite direction — far in the opposite direction.
Trends to note:
According to data from the National Council of Real Estate Investment Fiduciaries (NCREIF), commercial property values fell by approximately 30% during the Great Recession.
Vacancy rates in commercial properties, particularly in office and retail sectors, surged, reaching their highest levels in years.
Banks, stung by the subprime mortgage crisis, tightened their lending practices and raised downpayment requirements for commercial real estate loans.
The Challenge: Substantial Downpayments
One of the most prominent challenges that emerged in the post-recession era was the requirement for larger down payments. Prior to the recession, it was possible for investors to secure commercial real estate properties with relatively low downpayments — sometimes 10% or even less.
Now, gone were the days of no or low downpayment programs and Stated-Income loans. Required downpayments of 20-30% soon became the standard across the board. For many aspiring CRE investors, this hefty downpayment requirement posed a formidable barrier.
It restricted access to the lucrative world of commercial real estate to a select few who could afford to meet these demanding requirements. This change had a disproportionate impact on younger investors with access to less liquid capital.
A Ray of Light: Partnerships in Commercial Real Estate
Enter the concept of real estate partnerships. In the face of mounting downpayment challenges, partnerships have emerged as a powerful solution for breaking into commercial real estate.
Here, we will explore the benefits and drawbacks of real estate partnerships, supplemented by relevant statistics, to provide you with a comprehensive understanding of this strategy.
Benefits of Real Estate Partnerships
Access to Capital: One of the most significant advantages of forming a real estate partnership is access to additional capital. This can be crucial in meeting the higher downpayment requirements imposed by lenders in the post-recession era.
According to a study by the Urban Land Institute (ULI), real estate partnerships have been instrumental in securing financing for large commercial real estate projects, allowing for substantial investments.
Risk Mitigation: Partnering with others spreads the risk among multiple parties. This can be particularly reassuring for newcomers in the commercial real estate market, as they share both the financial burdens and potential rewards.
Data from the National Association of Realtors (NAR) suggests that investors involved in partnerships have a lower risk of experiencing significant financial losses compared to sole investors.
Diversification: Real estate partnerships offer the opportunity to diversify your investment portfolio. You can invest in different types of commercial properties, locations, or asset classes, reducing exposure to specific market risks.
Leveraging Expertise: Partnering with individuals who have experience in commercial real estate can provide valuable insights and expertise. This knowledge can be particularly beneficial for newcomers looking to navigate the complexities of the industry.
Drawbacks of Real Estate Partnerships
While real estate partnerships offer numerous advantages, it's essential to acknowledge their potential drawbacks as well:
Shared Decision-Making: In a partnership, decisions are typically made collectively, which can sometimes lead to disagreements or delays in executing investment strategies.
Disputes among partners can occur, and conflict resolution may require time and effort. Those who pursue partnerships as a business strategy will want to consult with an attorney to discuss the impact of ownership structure and percentages.
Profit Sharing: Partnerships involve sharing profits with your co-investors. Depending on the terms of the partnership agreement, you may receive a smaller share of the returns compared to going it alone.
Limited Control: In a partnership, you may have less control over the day-to-day management of the investment compared to being a sole owner.
Finding Compatible Partners: Finding trustworthy and compatible partners can be challenging. It often requires careful due diligence and networking efforts to identify suitable co-investors.
Conclusion
The Great Recession undoubtedly had a profound impact on commercial real estate markets, making it more challenging for new investors to enter the field due to heightened downpayment requirements.
However, by forming real estate partnerships, investors gain access to additional capital, mitigate risks, diversify their portfolios, and tap into valuable expertise. While partnerships are not without their drawbacks, careful planning, clear partnership agreements, and effective communication can help mitigate potential issues.
As the market continues to evolve, partnerships remain a valuable strategy for investors seeking to break into the world of commercial real estate.
To your success,
Jason Huett Collaborative Commercial, LLC.
CEO | CMO
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