The real estate blockchain startup scene is exploding and a large number of these startups are designed with residential real estate in mind. However, high investor demand — both institutional and private — centers upon commercial real estate (CRE), making it an extremely interesting and lucrative field for blockchain startups.
Additionally, CRE has a number of inherent benefits over the residential sector. Let’s briefly review them to understand why both experienced and aspiring investors are opting for CRE and what opportunities this opens up for blockchain initiatives.
Why Commercial Real Estate?
Investing in CRE has a number of benefits over its residential counterpart:
- CRE provides higher returns and rental yields than residential;
- lease agreements are usually middle- or long-term (3 to 10 years) compared to rentals agreements that tend to be short-term (6 to 12 months);
- CRE asset value is increasing over time and enjoys excellent potential for appreciation;
- tenants often take a contractual obligation to incur many costs, for example insurance;
- tenant-landlord relationships are professional and regulated by the agreement.
On the contrary, according to Ian Formigle at CrowdStreet, investing in single-family real estate and operating it as rentals has a number of challenges:
- excess risk (investing in residential real estate often involves more than 100% equity risk);
- lack of economies of scale (items such as roofs, heating systems, etc. demand large expenses and any force majeure events can consume all available income, if not more);
- binary occupancy (100% or 0%);
- costly management;
- entirely market dependent (the property’s value does not affect profitability. The latter depends on the conditions dictated by the market);
- geographical constraints (for the most part, investors are looking to invest in nearby properties in order to oversee them).
CRE: a flexible and diverse investment opportunity
Sophisticated investors who want to diversify their portfolios are grasping the benefits of investing in key CRE markets such as industrial, multifamily, office or hotel sectors for the following reasons:
Asset value in direct correlation with net operating income (NOI)
The greatest benefit of investing in CRE as opposed to residential real estate is that its intrinsic value (i.e., the revenue it generates) has a direct impact on investor profits, regardless of the market. This means that CRE investors have ample opportunities to invest in great properties in any location and receive good income while residential real estate investors have to overwhelmingly rely on the market.
CRE investors are not limited to any geographical area, nor business type. By partnering with property managers, they are able to invest in any commercial property they deem to be valuable.
The losses of a CRE investor are limited to the amount invested whereas it is not uncommon for residential real estate investors to incur in excess of 100% costs. Additionally, CRE tenants are contractually obliged to pay property management and insurance costs.
Calculating profitability of a CRE asset may be complicated but it is usually more accurate compared to residential real estate. By taking into account a variety of factors such as location, size, nearby infrastructure, etc. and building a mathematical model, investors can get a better forecast of future revenue.
Investing in commercial real estate is a perfect option for people who are willing to do their research and explore beyond nearby areas and residential neighborhoods. Not to mention that CRE is a top investment choice for big institutional players like public and private sector pension funds, endowment plans, insurance companies, wealth managers, asset managers or superannuation schemes.
Designing better technology for commercial brokers to manage their portfolios is an exciting challenge the industry is busy working on.