Daily Journal of Commerce
Many investors in CRE are asking the question: “What inning are we in for the CRE investment cycle?” They are concerned about being late in the CRE cycle because they hear this question over and over.
This question about ‘what inning are we in?’ is too generic and not really the correct question. It’s like asking, “How is the weather is in the United States today?” It is not very helpful or relevant to anyone interested in their local weather. The same goes for real estate investing.
In this article we are going to focus on Commercial Office buildings.
Too many investors and consultants refer to the ‘real estate cycle’ when analyzing investments into CRE. Again, this is too generic to view all CRE in a cycle. Regions and cities have completely different dynamics and investment outlooks for different types of buildings. For instance, at any given time, the Austin, TX market can be completely different than the Seattle market. Certain parts of New York City can be very different than other parts of NYC. Portland can be very different than San Jose. Thus, to just ask ‘what inning are we in?’, assumes the investment ‘game’ is close to ending and that the ‘cycle’ will turn down. Now how many times have we heard ‘that the cycle was topping out’… three years ago (2015), two years ago (2016), etc.?
Events can cause downturns in a specific market or type of investment. Today is very different than the events that caused such sharp downturns in CRE back in 1990, and 2008. Today there is much less easy financing available to develop office buildings from the ground up. There is not a constant supply of office buildings coming online in various cites causing large vacancy overhangs. The speculative development of office buildings is greatly reduced compared to the late 1980s and mid 2000s.
So, what has changed? Investors must not confuse lower return expectations with the end of a cycle. The return profile that investors are hoping to achieve, when they invest into commercial office buildings, has come down in the past years. There are no ‘+15% returns/IRRs’ available in a Class A commercial office building where a building is over 85% leased. That spread has closed significantly over the years as many investors entered the market and paid higher prices for Class A buildings. There is a vast amount of money looking to invest into Class A office buildings and thus the return profile has come down significantly. Investors must adjust their expectations. But a lower return profile does not mean the end to the ‘cycle’. It may be disappointing for some investors to only achieve a 4%-7% return in Class A office buildings with high tenant occupancy. But that is the current market.
When interest rates are relatively low, and return profiles for CRE decline, investors may be tempted to reach for high return targets for investments, not realizing the potential additional risk they are taking. Real estate is illiquid and not a short-term investment. The first question an investor should ask is whether the investor is investing for current yield and cash flow payouts, or is the investor foregoing current cash flow in search of higher returns when a project or asset comes online and begins to pay out cash and is then hopefully sold at a higher price to meet the target IRR of the investor.
Currently there are many small CRE deals being offered to individual investors via platforms and small sponsors. Individual investors may be tempted to shop for, and chase deals that have higher potential target IRRs. Just remember that a target IRR means very little. It is just a projection of assumptions made by the sponsor.
We will refrain from using the other most used cliché in CRE: “Location, Location, Location”. CRE Investment is about the specific deal, which includes the location, the financing, the cash flow, and the vacancy and most importantly, the potential for exit at a higher valuation. Investors must look at the sponsor and its capability to add value to the assets and exit the investment in a positive manner for its investors. So, the cycle does not end for CRE. The market for CRE adjusts return profiles and yields, and thus investors must do the same. The right markets and right assets can still provide attractive relative returns if the investor and sponsor are willing to do the hard work of analyzing the risk and reward of a specific CRE investment.
There are many CRE investment ‘games being played’, in specific markets, and specific assets. Each one of those CRE Investment ‘games’ are in their own specific ‘inning’. Now it is time to evaluate the ‘situation/investment’, and then execute on the investment plan for that specific ‘game/building’.
Institutional Real Estate, Inc.
The question that some may ask is why do individual investors pay commissions and sales loads to invest in the same buildings and assets that institutional investors invest in? Because that is the way ‘it has been for decades. This answer typically comes from the sponsors and distributors that may say: “It is expensive to connect with investors who are investing in amounts of $10K, $25K, $50K. The processing of these ‘tickets’ is cumbersome and time consuming.”
But now technology, regulatory changes and transparency are changing the old model for individual investors paying commissions and loads to invest into a fund, REIT or related CRE product. Only a few Institutional sponsors, managing investments for institutional investors, are offering direct access, with no commissions or loads, to individual investors.
KBS is one of the leaders in the CRE industry and has created direct access for investors to invest into institutional quality commercial office buildings. One of the keys for investors is transparency into the REIT so that they can review the buildings and perform all the due diligence they want on the portfolio. This investment process was typically reserved for large institutional investors, but KBS has now opened the door to individual investors to participate in the same REIT/Fund evaluation and investment process as its institutional investors, without having to pay commissions and loads to invest.
So how does KBS offer direct investment access to individual investors?
The majority of REIT and Fund investments are offered through brokers and advisors. Individual investors may have relied on their advisors to suggest real estate investments and products for their portfolio. There has typically been a commission, fee, or load charged to the investor by the broker. Sometimes these fees can be high.
Some Institutional real estate sponsors are selling their REITs and investments through brokers and wire houses. The brokers may charge their investors a commission and/or load for these investments, which may reduce the potential yield and return to the end investor.
KBS is offering its REITs and funds directly to investors, and eliminating the commission and loads charged to investors. KBS can do this because it pays the commissions to complete the transaction and thus, 100% of an investor’s capital is put to work into the existing portfolio and buildings
Investors may benefit from this model
There are two types of investors who may benefit from this model:
The era of investors being able to invest into institutional quality real estate with an institutional quality sponsor like KBS, where individual investors do not pay commissions or sales loads to invest is here. You may invest like the institutional investors do with KBS: Direct Access into existing institutional quality office buildings, and at no cost to the investor to invest.
Investing in KBS Growth & Income REIT includes substantial risks. These risks include, but are not limited to: the possibility of losing your entire investment; no guarantees regarding performance; upon sale or distribution of assets you may receive less than your initial investment; fluctuation of the value of the assets owned by KBS Growth & Income REIT; lack of a public market for shares of KBS Growth & Income REIT; limited liquidity; limited transferability; reliance on KBS Capital Advisors LLC, the REIT’s advisor, to select, manage and dispose of assets; and various economic factors that may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Shares of KBS Growth & Income REIT are not suitable for all investors. Investors should read and consider the PPM carefully before investing.
KBS Direct makes no representations as to the appropriateness of an investment in KBS Growth & Income Real Estate Investment Trust for ERISA plan fiduciaries and IRA owners and no investment advice is being provided. ERISA plan fiduciaries and IRA owners should consult with their own advisors and counsel before making an investment in the REIT’s shares. This is not an offer to sell securities. Offers to sell, or the solicitations of offers to buy, any security can only be made through a private placement memorandum and other official offering documents that contain important information about risks, fees and expenses.
Securities offered through North Capital Private Securities (NCPS).
KBS Growth & Income REIT Increases Minimum Investment Amount to $25,000
NEWPORT BEACH, Calif. (November 5, 2018) – KBS Growth & Income REIT announced that its Board of Directors has approved an increase in the initial minimum investment in its ongoing private offering. The minimum initial investment for its offering will increase to $25,000 from $10,000, effective November 15, 2018. Investors who subscribe and invest before November 15, 2018 may invest at the $10,000 minimum amount.
“KBS is one of the first sponsors to offer a direct-access institutional quality real estate fund without any upfront fees or commissions and seeks to maintain high standards aligned with investor interests,” said KBS Chief Executive Officer Chuck Schreiber. “We believe that by offering investors direct access to monthly distributions and potential NAV growth through high-quality, diversified multi-tenant real estate opportunities, KBS Growth and Income REIT delivers a compelling offering that is unique in the marketplace.”
“Since Q4 2017, KBS is now making shares of KBS Growth and Income REIT available to accredited investors for direct purchase through KBSdirect.com,” said Lew Feldman, President of KBS Direct. “KBS Direct provides a convenient online process for accredited investors to participate in commercial real estate investments on par with large institutional investors. KBS Direct empowers the individual investor and its advisor to invest in institutional quality, professionally-managed, income-producing commercial real estate assets just as public pensions, sovereign wealth funds and large financial institutions enjoy.”
KBS is one of the largest owners of institutional quality commercial property in the U.S. and presently has over $11.4 billion in assets under management with a total transactional volume exceeding $38 billion. The KBS Growth & Income Fund is well established with assets in four major U.S. markets, Portland, Houston, Chicago and Orange County, Calif.
With as little as a $25,000 investment, investors can gain access to quality assets managed by the 8th largest office building owner in the world. Assets within the KBS Growth and Income REIT have been carefully vetted by KBS professionals with decades of commercial real estate experience in key markets across the country.
The increased minimum initial investment is for subscription agreements signed and submitted after November 15, 2018. All related documents and funds for an investment must be received by KBS no later than November 30, 2018 to process an investment at the initial minimum investment amount of $10,000. Once an investor has satisfied the minimum purchase requirement as of the date of initial investment, any additional purchase may be in the amount of $2,500 or more.
Investors can visit www.KBSDirect.com for more information on KBS, the KBS Growth & Income REIT and the underlying office building assets in the REIT. Investors can gain direct access to these institutional quality assets via KBSDirect.com.
About KBS Direct
KBSDirect.com is an online portal that empowers accredited investors to invest directly in professionally managed, institutional-quality real estate portfolios, offering access similar to that available to KBS’s institutional investors and partners. KBSDirect.com’s first direct share offering is KBS Growth & Income REIT, a $1.0 billion offering conducted under Rule 506(c) of Regulation D. Investors pay no up-front sales commissions and investors’ funds go directly into the REIT. KBS Growth & Income REIT is sponsored by KBS, which was ranked by National Real Estate Investor as the 8th largest commercial real estate company in the United States. (**The ranking by National Real Estate Investor is based on volume of office space owned globally, as of December 31, 2017. The results were generated from a survey conducted by National Real Estate Investor based on a combination of advertising and website promotion of the survey, direct solicitation of responses from participants, direct email to National Real Estate Investor subscribers and other identified office owners and daily newsletter promotion of the survey, all supplemented with a review of public company SEC filings.)
KBS Growth & Income REIT may fund distributions from any source including, without limitation, from offering proceeds or borrowings. Distributions paid to date have been funded in part with cash flow from operating activities, debt financing, including advances from KBS Growth & Income REIT’s advisor and cash available as a result of the deferral of the asset management fee by KBS Growth & Income REIT’s advisor. There are no guarantees that KBS Growth & Income REIT will continue to pay distributions.
KBS Holdings LLC intends to sponsor a public offering pursuant to Regulation A under the Securities Act of 1933, as amended. No money or other consideration is being solicited at this time with respect to such offering, and if sent in response to these materials for such an offering, it will not be accepted. No offer to buy securities can be accepted and no part of the purchase price can be received for an offering under Regulation A until an offering statement is qualified by the U. S. Securities and Exchange Commission, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date. An indication of interest made by a prospective investor in a Regulation A offering is non-binding and involves no obligation or commitment of any kind. Securities Offered Through North Capital Private Securities, Member FINRA/SIPC.
There are many investors who are unaware that they can invest into alternative investments, of their choice, using their Individual Retirement Account (IRA) investment dollars.
Numerous sophisticated investors want to invest into alternative investments (such as individual real estate assets, REITs, private equity, etc.) in their IRA accounts but are limited from doing so because these investments are not available or offered on their financial advisors’ platforms. For investors who want to deploy their IRA capital into real estate and real estate alternative investments of their choosing and selection, an option for them is to open a Self-Directed IRA Account, outside of their traditional brokerage advisory account.
What is a Self-Directed IRA Account?
A self-directed IRA account (SDIRA) is an account that allows the investor/account holder to invest into many types of assets and funds, including alternative investments selected (SELF-DIRECTED) by the investor. SDIRA accounts are provided by Trust Companies who act as custodians for IRA accounts, the same way traditional brokerage firms custody their IRA accounts. The account owner chooses the investments that they are interested in funding, and then the Trust Company processes the investment as custodian. The benefits of using a SDIRA to make investments into real estate and real estate alternative investments is that in most cases, private real estate investments and REITs, are not available to investors via traditional brokerage firms and advisors because those firms do not want to deal with the processing of alternative investments, private funds, nor specific assets like a single office building.
Benefits of investing into Real Estate using an SDIRA
The concept of investing in real estate and using alternative investments, selected by the investor/account holder, in your Self-Directed IRA could be a new idea to many. The benefits of using a traditional IRA held at brokerage firm, and a SDIRA, are the same from a tax perspective. The big difference being the ability of the account holder to select investments that are typically not offered, nor serviced, at traditional brokerage firms. There are a number of benefits to investing into real estate via an IRA:
Investing in Real Estate for yield and growth using a Self-Directed IRA
Everyone has different investment goals and strategies for their risk/return profile. Many investors and allocators have two buckets for investment allocations to real estate.
For a yield alternative to publicly traded fixed income instruments (bonds, preferred stocks, MLPs, mortgages, etc.) where rates and yields are relatively low, some sophisticated investors make investment allocations for their SDIRA into high-quality, stabilized real estate where the cash flow from the buildings, meets their investment targets and goals for current income. Real Estate Sponsor choice is just as important as choosing the region and specific asset. You may make a well thought out investment into a type of commercial real estate (Office, Multi-Family, Retail, etc.), in a good region, but the sponsor/asset manager should be a firm with an extensive track record of performance.
The two types of alternative investments that investors typically consider for the ‘Yield Bucket’ are:
The ‘higher return target Growth bucket’:
So, what is a Do-It-Yourself investor to do?
The business of Self-Directed IRA custody and administration is a relatively large industry, although not well known compared to traditional brokerage firms and their custody services. The reason for this is:
Educational resource for how to use a SD-IRA for investments into Real Estate:
There are significant participants in the SDIRA industry providing the service of custodian for a large number of alternative investments. Many of these SDIRA firms have extensive educational information available to investors to learn how to use their IRA dollars for investments into real estate and real estate alternative investment products. The article link below provides additional info on Self-Directed IRAs.
KBS Direct makes no representations as to the appropriateness of an investment in KBS Growth & Income Real Estate Investment Trust REIT for ERISA plan fiduciaries and IRA owners and no investment advice is being provided. ERISA plan fiduciaries and IRA owners should consult with their own advisors and counsel before making an investment in the REIT’s shares. This is not an offer to sell securities. Offers to sell, or the solicitations of offers to buy, any security can only be made through a private placement memorandum and other official offering documents that contain important information about risks, fees and expenses.