Per the Wall Street Journal (WSJ) dated Oct 10, investors lost $2.5 trillion of wealth just in the previous 7 trading sessions and $8.4 trillion since hitting an all time high a year earlier. Buried under many big headlines about the troubled economy is a small report on the Sept. 27 issue of the WSJ about the still very low default rates for $5 trillion income-producing commercial properties. The default rate for commercial mortgage-backed securities (CMBS) loans or “conduit” loans is .47%. The rate is only .03% for commercial loans from life insurance companies. “Why is it so low?” you might wonder. Commercial properties generate 50% to 200% more rental income than residential properties so cash flow is strong. When the rent collected from the tenant is more the mortgage payment then it’s hard to fall behind. Some of the tenants, e.g. Walgreens are very resistant to recession so they have money to pay the rent. So it is not an accident that commercial real estate is one of a few bright spots in any kinds of investments.
As the baby boomers are heading towards retirement, financial advisors recommend them to allocate more of their investments from volatile stock market to an area that is more stable and generate strong income. Commercial real estate has proven to be stable even in the toughest times since 1930. With all the volatility in the stock markets, the question you should ask yourself is “are you heading towards the right direction in your investments?” If your answer is no or not sure then it is time to pause, reflect and make changes.
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