"Isn’t there a real estate bubble in the US right now?" It’s a question I’m asked often these days, and it’s an interesting question, because the real estate market in the US is so developed, and very specialized now, there is no simple yes/no answer.
Yes, some areas, particularly residential property in major metropolitan areas are expensive. And not just in the US. I hear property owners in places as far as Sydney and Auckland talk about local housing bubbles. Others, like our investment area in downtown Seattle, are still reasonably priced. Our category is commercial/industrial, and our area has always had very low turnover. Warehouses are not sexy, but over the years have grown steadily.
To get an idea of the breadth of the market, take a look at only publicly traded real estate in the US: There are over 300 publicly listed REITs with over 20 specialties, and all levels of risk. Specialty can be by region, or by category. There are real estate companies that focus only on investing in mortgages, retail, warehouses, hospitals, residential, etc.
Privately-owned investment real estate, however, vastly exceeds the value of the publicly held market. American Life’s investments are private limited partnerships. Limited partnerships are the most common structure for multiple parties investing in US real estate. (Interestingly, it was the financing of the Empire State Building in New York that created the first limited partnership in the US.)
In addition to specialization by industry category, real estate investments vary according to the financing model. This really boils down to the level of debt they incur. Some are highly leveraged, some less so. The tendency is to have some level of debt, often between 40-60% of asset value in the portfolio. Again, American Life has a conservative strategy, since we minimize and on most properties completely eliminate the debt.
For long term investors, though, the reason for investing in real estate is for the income it produces. Of course, it’s also important to be in a desirable area. Our property is located in a neighborhood undergoing gentrification, which always enhances returns.
As markets in paper-based investments like stocks and bonds become less certain, more investors are looking to the safety that hard assets like real estate provide. Real estate often makes sense as a component of one’s investment portfolio.
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