Asset Classes Overview
Office: Relatively easy to own and operate. However, finding tenants to match the spaces means the pace of leasing can be slower than other asset classes. Like retail, the performance of this asset class is directly tied to the economy and when the economy suffers, the office market tends to suffer as businesses close or scale back. There’s an abundance of vacant office properties, and even if you own properties that aren’t vacant, the risk of vacancy is prevalent until the economy experiences strong, steady growth. For this reason, we discourage our clients from investing in office properties at this time.
Retail: Shopping centers, malls and strip malls are relatively easy to own and operate. However, finding tenants to match the spaces means the pace of leasing generally takes longer than all other asset classes. If the space does not match, the owner must expend significant capital to convert the space to fit the needs of the tenant. Tenants also often require the landlord to install equipment and enhanced utilities to suit their needs. Like office, the performance of this asset class is directly tied to the economy and when the economy suffers, the retail market tends to suffer as businesses close or scale back. There’s an abundance of vacant retail properties, and even if you own properties that aren’t vacant, the risk of vacancy is prevalent until the economy experiences strong, steady growth. For this reason, we discourage our clients from investing in retail properties at this time.
Apartments: The most “popular” and abundant commercial asset class in the Nation. Relatively simple to own and operate, and easier to sell than some of the other commercial asset classes since there are more buyers. However, apartments are management intensive, and the maintenance and repair expenses are relatively high. Don’t overlook the liability inherent in having lower income tenants who can be litigious to improve their financial situation. Apartments tend to weather economic recessions since many former homeowners become renters, although not as many as people think, especially in geographic regions where the population is migrating away from the area.
Senior Living: There are three categories of senior living:
Independent Living: This is an age-restricted apartment for residents 55 years and older. Housekeeping, meals and transportation are typically provided, which makes this class more management intensive than apartments. However, SIL residents tend to make better tenants who stay longer term and aren’t as prone to abuse their dwellings. The cash flow can often be stronger than apartments making the class worth the extra management. Many states do not require licensing.
Assisted Living: Assisted living requires a license to operate, as well as on-site and off-site health care employees to administer medications and provide other limited nursing services. ALFs are very management intensive (but very profitable), and thus structured as a business which typically leases the real estate.
Skilled Nursing: Essentially a small, private, long term care hospital, skilled nursing is the most management intensive of the three.
The long term outlook for senior living is expected to be very strong as the growing senior population continues to drive demand.
Mobile Home Parks: Also knows as “trailer parks”, this asset class is essentially an apartment where the tenant owns the dwelling (but not always), and you are leasing pads of land to the tenant. This makes owning and operating this property type relatively simple. Contrary to the stereotype, not all parks are in remote areas or occupied by troublemakers. Mobile home parks are at the lowest tier of the housing strata, and therefore they tend to perform well during a recession, as well as during good economic times. There are a number of additional profit centers that can be incorporated into a park. The land of a park can be developed into a higher and better use without significant demolition. The long term outlook for parks is positive: Demand is increasing (recession), and supply is decreasing (due to development of existing parks, the fact few municipalities allow new ones to be developed).
Self Storage: Also known as “mini-storage”, this asset class is essentially an apartment without tenants. For this reason it is easier to own and operate than apartments. Evictions are quick and simple, and liability is minimal. Maintenance and repairs are also minimal, and therefore the break-even occupancy is lower than any other asset class, as well as the historical default and foreclosure rate. Storage enjoys more profit centers than any other asset class, and generally performs well in a recession. The recent growth in popularity has made selling this asset class almost as easy as apartments.
Hotel: Also known as “hospitality”, this asset class is essentially an apartment with very short stays. As a result, it is very management intensive and the operation is considered a business. Larger hotels must provide many services which require many employees. The performance of hotels also correlates strongly to the performance of the economy. The drop in business and tourism travel has adversely impacted hotel performance, and the performance can be extremely volatile. For this reason we generally discourage hotel acquisitions, except in rare circumstances and by experienced owners.
Parking Garage: This asset class is a blend of self storage (no people living inside), and a hotel (very short stays). They are easy to own and operate, low maintenance, and in many areas garages are strong cash cows. As a result, they are rarely sold and discounted deals are difficult to find.
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