Commercial real estate is gaining popularity as an investment option due to current market conditions. As investors seek to diversify their portfolios amid global economic uncertainty and spotty stock market returns, lower interest rates and the potential for steady rental income makes investment in office buildings, apartments communities and other commercial properties attractive options.

Commercial real estate’s relatively stable and steady income stream can help offset other, more risky investments. Financial advisers recommend adding real assets to an investment portfolio to help mitigate risk. In previous newsletters, we have highlighted how real estate stacks up against stocks and we have discussed why CRE investment is a hedge against inflation. Today, we dive a little deeper into how to invest.

“These days, amid low interest rates, an increasingly expensive U.S. stock market and choppy global economic growth, other financial advisers are looking to commercial real estate to boost returns for clients and diversify their portfolios,” wrote Anna Prior in a February 25 Wall Street Journal article.

Benefits of direct investment in CRE

Investors could access commercial real estate through a fund, such as a real-estate investment trust (REIT), but Prior reports that financial advisers have seen a demand for direct investment from clients who want the ability to inspect the property personally.

“Clients wanted to touch and feel the asset, they wanted direct exposure” Big Sur financial adviser Rafael Iribarren told the WSJ.

He went on to tell the publication that his clients like having more direct influence on decisions made regarding the property, and they prefer to be selective in the types of properties they add to their portfolios. With REITs, investors do not have control over which properties are included in the funds.

Investopedia likewise spelled out the advantages of direct real estate investment in a recent article, including greater control over the property, lower tax burdens and potential for much greater returns.

“Like any investment, the more money you invest, the more money you can earn. So by putting down $100,000 on a property, you’ll likely earn more than a REIT investor putting $1,000 into a real estate investment,” reports Brian O’Connell in the article.

BiggerPockets, a real estate investment blog, points out the large disparity between REIT and direct-investment returns and calls REITs “poor cash flow investments.” Later, the author also calls them “volatile” and writes that, at one point, REITs dropped 60 percent in value while the NCREIF property index fell only 15 percent.