Currently, most asset classes appear very expensive. The stock market is now trading at all-time highs and near historically high valuation metrics, while, interest rates are still near all-time lows, which means fixed income investments continue to offer very low cash flow streams. Even residential real estate prices have jumped and showing the fastest year-over-year price increases in more than 30 years.
But there are always opportunities in the market. It is just more difficult to identify them. According to Brookfield Asset Management’s CEO, Bruce Flatt, believes commercial real estate market is a generational buying opportunity. If you have a long term view and you go along with Warren Buffet’s approach to be fearful when others are greedy and greedy when others are fearful then this should be the time to buy.
There is enough fear in commercial real estate. Due to the pandemic most office buildings are empty, and with talk of many workers never returning to them, commercial real estate prices have fallen substantially. This is especially true in big cities, where prices have fallen by 20%-40% on many commercial properties. Just imagine commercial real estate eventually reverting to something close to what it was before COVID-19. This won’t happen overnight but it would be extremely profitable. Rents (cash-flow) will increase as well as the capital appreciation on the building itself.
And if you believe that inflation shows its ugly face, real estate is an excellent hedge.
Of course, you can buy a commercial real estate ETF but another excellent way to profit from a commercial real estate recovery is investing in CoStar Group (Nasdaq: CSGP), the world’s leader in commercial real estate information provider. CoStar Group is a high-quality growth company and makes money by selling access to data and providing software solutions and advertising. additionally, it is creating a marketplace where commercial properties can be bought and sold online. Currently, only 2% of commercial real estate transactions take place online. With these two growth platforms, CoStar should be able to grow earnings at a rate in excess of 20% in years to come.
That makes CoStar one of the great growth companies that you can buy and hold for the really long term. A recovery in commercial real estate will just add more profit opportunities.
Sven Franssen