Real Estate Investing

We previously discussed how Kroger is eyeing real estate development in India. Though it sounds very random for a U.S. grocery chain giant to enter a foreign market like that, the real estate market in India is on fire right now. Besides, such a move would provide Kroger with some very strategic advantages in any future international expansion.

Now real estate might be bandied about by the Target Corporation as well, though for a slightly different reason. According to the Minneapolis Star-Tribune, activist hedge fund manager William Ackman predicted Target’s stock value could improve 240% with a few strategic business moves, including the liquidation of their roughly $42 billion in real estate holdings. In an unusual retail decision, Target has chosen to own 95 percent of its retail locations in order to “maintain control over stores and avoid complicated leases,” the article states. Ackmann wrote a Dec. 27 letter to his investors that stated the following:

“In our view, the stock market gives Target no credit for its large and valuable real estate portfolio… We believe that there are transactions that will enable Target to monetize the company’s real estate and development business in a tax-efficient manner.”

Ackmann plans to meet with Target to discuss his analysis of its real estate options early this year. He met in August with the company to discuss his suggestions that it amp up the share buyback initiative and sell off its credit card business. The company soon announced it was considering plans along those lines. So Ackmann’s opinion holds considerable sway, which explains why he bought nearly 10 percent of Target’s total shares. As it turns out, it’s not just because his family shops there, as he had previously alluded to.

It may seem an odd time to look at U.S. real estate as a boost to corporate value, but as previously noted here, commercial real estate is doing just fine, with retail space being one of the strongest sectors.

Commercial real estate is faring much better than residential real estate these days. Many investors have turned their attentions toward that segment of the market in the hopes of maintaining a profit during slow times. However, those planning to invest in commercial real estate should identify which sectors are the healthiest.

Office property prices are up about 13 percent over the last year. The worst performance was seen among apartment complexes, with a 1.3-percent dip over the last year despite small rallies in July and August. This may be tied in part to parents’ increasing willingness to invest in student housing for their college students.

Retail is by far the strongest aspect of the commercial real estate market, with 10 percent gain on the year, according to the S&P Index. While all real estate is somewhat shaky investment-wise at the moment, commercial property certainly seems to be the stronger of investment options.

Commercial real estate is where it’s at. Financial Week today referred to the “credit crunch” as a “speed bump” for the commercial market, even though it proved a major setback for the residential real estate market. Commercial space is primarily leased rather than owned, which only helps the market conditions. After all, even with residential real estate, the rental market has surged and it’s not a bad time to be a landlord.

Unlike the residential real estate market, commercial real estate is healthy across all sectors. Commercial real estate is enjoying its highest occupancy rates since late 2001, and lease rates are at a record high. Sales volume in the commercial real estate market cannot be denied, for it is also at a record high.

For the purposes of illustration, take a look at Las Vegas. The area’s residential market is seeing soaring foreclosure rates, tremendous inventory surplus and falling prices. Meanwhile, the commercial real estate market is robust, particularly in industrial and multi-tenant retail complexes. The Nevada Business Journal recently quoted David Goldwater, founder and president of private lender Goldwater Capital, LLC.

“You remember last year how everyone wanted to turn retail into single-family housing? Now they want to go the other way around,” Goldwater said.

Investors will want to avoid jumping the residential real estate ship completely, because most analysts say that ship will be righted within a year. At any rate, commercial is worth exploring in most markets, and it’s a relief to know that some property deals can still bring prosperity.