As a professional commercial real estate investment firm, we believe that there is a strong argument for the inclusion of this asset class as part of a broadly diversified portfolio of risk assets. Aside from the most commonly cited benefits – like income, price appreciation, and favorable tax treatment – there is an even larger argument that often goes unmentioned. Due to its size and scale, commercial real estate plays a vital role in supporting and housing the businesses that make the US Economy run. As an asset class, it doesn’t just represent a potential investment opportunity, it is an indispensable component of trade and commerce.
Before discussing the numbers that support this assertion, it is first necessary to define exactly what commercial real estate is.
What is Commercial Real Estate?
The definition of commercial real estate describes it as any property that is purchased with the intent to earn an investment return through income, price appreciation, or both. Broadly, there are four commercial real estate property types:
- Office: Properties that are designed for the needs of running a business. An office can be designed for a general purpose – like an accounting firm – or it can be custom built for companies that have specific needs, like a dentist’s office.
- Industrial: Properties that have an “industrial” purpose. These include manufacturing facilities, flex spaces, and warehouses.
- Multifamily: Any property with five or more residential units within the same location. These could include garden style apartments spread across multiple buildings or high-rises where all units are contained within the same building.
- Retail: A property that supports a consumer facing business. These include shopping malls, strip centers, grocery stores, and “big box” businesses like Best Buy or Home Depot.
Within each of these categories, there are sub-categories that further describe the exact type and purpose of the property. Despite the differences in these categorizations, there is one thing that all commercial real estate properties have in common. They are owned by an individual or firm who leases the space to tenant businesses in return for a monthly rental payment. These payments generate a return on the investment needed to purchase the property and create a trickle down effect that supports thousands of US businesses and jobs.
What Percentage of the U.S. GDP Does Commercial Real Estate Account For?
Commercial real estate assets contribute to US economic output in two ways, construction and management. The construction of new CRE projects each year creates tens of thousands of high paying jobs and supports an entire supply chain of labor and materials. Once complete, management of CRE assets supports additional employment in roles like maintenance, property management, and accounting. To illustrate this point, NAIOP’s “Economic Impacts of CRE 2021 US Edition Report” states that:
“combining the economic contributions of new development with economic contributions from operations of existing buildings in 2020 resulted in direct expenditures of $357.8 billion. Collectively, these expenditures:
- Contributed $1.01 trillion to U.S. GDP
- Generated $338.1 billion in personal earnings
- Supported a total of 8.0 million jobs (both new and existing).”
By NAIOP’s estimate, the total economic contributions from building and non-building construction made a 21% contribution to 2020 US Gross Domestic Product. Within this figure, the largest contribution comes from construction spending and the report goes on to break down construction expenditures by asset class.
Office Space Construction
Office space construction expenditures totaled $38.9B in 2020, down 28.5% from the $54.33B spent in 2019.
Industrial/Manufacturing Construction
Industrial/manufacturing construction spending was hard hit by the pandemic, declining 59.1%. It fell from $32.47B in 2019 to $13.18B in 2020.
Warehouse Construction
Warehouse construction spending was relatively flat in 2020, decreasing marginally from $30.15B in 2019 to $30.07B in 2020. It should be noted that this is believed to be temporary. The COVID-19 pandemic has created an intense interest in warehouse space and these numbers are expected to see an uptick in 2021.
Retail Construction
Retail construction spending fell from $16.62B in 2019 to 11.72B in 2020. This is a 29.5% decline and marks the fifth straight year of declines in retail construction spending.
Each year when construction is completed, these newly completed assets are added to the pool of commercial real estate available for rent. Combined, these assets represent significant value.
What is the Combined Value of All Commercial Real Estate in the U.S.?
Given the impressive 2020 construction spending numbers, it only makes sense to put these in the context of the total market value of all commercial real estate assets.
A July 2019 report by NAREIT estimates that the combined value of all commercial real estate assets in the United States is between $14.4 and $17 trillion dollars. The table below breaks down this value by property type and the amount of square footage occupied:
There are several key takeaways from this table:
- From a value perspective, multifamily apartment rentals are the most valuable real estate asset class in the U.S., with an estimated $2.9 trillion in aggregate value as of July 2019.
- From a square footage standpoint, industrial properties have the largest footprint, accounting for20.7 billion SF of space for a combined value of $1.5 trillion. Given the pandemic-driven surge in demand for industrial space, it is likely this value has increased since this report was published.
- Of the four major asset classes, office space has the smallest square footage. There are roughly 11.2 billion square feet of office space in the U.S., with a combined value of $2.5 trillion.
- There are 13.6 billion square feet of retail space in the U.S., with a combined value of $2.4 trillion.
Given the staggering value of commercial real estate assets, an obvious question is “who owns all of these properties?”
Who Owns/Controls The Bulk of Commercial Real Estate Assets?
Given their size and cost, there are few individual commercial real estate property owners. Instead, the bulk of their ownership is concentrated in the hands of two types of investment firms: REITs and Private Equity.
REITs
A Real Estate Investment Trust REIT is a tax advantaged entity formed specifically for the purpose of purchasing real estate assets. In this structure, investors purchase shares in the >REIT, who then couples investor capital with debt and uses these funds to purchase commercial real estate assets. In return for their ownership, the investor is entitled to a share of the income produced by the REIT owned properties. As long as the REIT meets certain requirements, investors benefit from certain tax advantages. REITs can be publicly or non-publicly traded.
According to NAREIT, an industry trade group, “REITs of all types collectively own more than $3.5 trillion in gross assets across the US, with stock exchange listed REITs owning approximately $2.5 trillion in assets, representing more than 500,000 properties.” Using the midpoint of total value figures above ($15.5B), it could be imputed that REITs own ~22.5% of all CRE assets.
Private Equity Firms
A private equity firm serves a similar purpose in the sense that they raise equity capital from investors and deploy it into commercial real estate assets. But, they have a different legal structure and are only available to high net worth investors.
Private equity ownership numbers can be difficult to come by since these firms are privately held and are not required to report them. However, it can be useful to look at the largest capital raisers as a proxy for ownership. According to Wall Street Oasis, Blackstone was far and away the largest capital raiser in 2020 with an astonishing $64.9 billion. The next closest firm was Brookfield Asset Management who raised $29 billion.
According to their website, Blackstone has $196 billion in investors’ capital under management and the total value of their real estate portfolio is $368 billion. So, while it can be difficult to determine the total value of private equity holdings, it is safe to say that they are substantial.
Like REITs, private equity firms combine these funds with debt, use them to purchase commercial properties, and distribute returns to their shareholders. They are among the largest owners and operators of all types of commercial real estate and will continue to be for the foreseeable future.
Why Does This Matter To Investors?
The point of the statistics outlined in this article is this: commercial real estate plays a critical role in the US economy. It is an exciting and dynamic field with a significant number of potentially profitable investment opportunities. These opportunities span all commercial real estate markets (like New York, Florida, and Washington DC) and property types and they can be an excellent way to add a layer of diversification to the traditional stock/bond portfolio.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
