How to Profit from the Decline of Commercial Real Estate


As the commercial real estate market continues its recovery from the 2008 crash, many investors are seeking opportunities to profit from this trend. One strategy is to bet against commercial real estate by investing in products that increase in value as the market declines. The most common approach is to take short positions in real estate investment trusts (REITs), which are companies that own and operate income-producing real estate. By betting on the decline of a REIT’s portfolio, investors can potentially earn a profit.

Betting Against Commercial Real Estate

Real estate is a cyclical asset class that experiences ups and downs over time. However, timing the market correctly to make significant gains is challenging. To bet on a decline in commercial real estate, it is essential to identify REITs that are likely to decrease in value within a short period. One way is to short sell the shares of a REIT by borrowing them and selling them at a profit. Alternatively, purchasing put options on a REIT that is anticipated to lose value is also a viable option. Another approach is to consider shorting a real estate ETF that aligns with negative market views.

The Impact of Market Shifts

Changes in one category of real estate can have an impact on other sectors, leading to shifts in the overall real estate landscape. Inverse or bear ETFs focused on real estate allow investors to profit when the opposite of a specific array of securities falls in value. Real estate tends to become overvalued in cycles, influenced by factors such as inflation, wages, and Federal Reserve actions. Investing in inverse real estate bear ETFs is a simple way to avoid exposure to potential housing and building market downturns.

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Strategies to Bet Against the Real Estate Market

While there is no foolproof way to bet against the real estate market due to its inherent volatility, there are strategies investors can use to minimize risk and potentially profit during a market downturn. One approach is to invest in real estate ETFs or mutual funds that track a broad index of property-related stocks. These funds tend to perform well when the real estate market is in a slump, offering diversification and downside protection. Another strategy is to short individual real estate stocks or ETFs, which is more speculative but can yield profits if timed correctly.

Assessing the Housing Market

Renting out homes is a growing trend, with increasing numbers of African Americans, Hispanics, young adults, older adults, whites, and college-educated households seeking rental properties. However, in terms of the real estate food chain, the commercial sector is currently in a weak position. Commercial real estate prices are set to decline in 2016 for the first time since 2007. Consequently, caution may be warranted when considering investment in real estate ETFs such as the iShares US Real Estate ETF (IYR).

The Best Approach for Betting Against the Market

Shorting stocks is one method to make a bearish bet on the housing market. However, it’s important to carefully consider the most suitable stocks for shorting. While shorting a REIT is an option, it may not always be the ideal choice. Short selling carries risks, and thorough research is necessary before making any investment decisions. Continuously monitoring the market and making shorting decisions based on housing market indicators is crucial.

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Shorting a Real Estate Bubble

A real estate bubble forms when home prices rise rapidly, making them unaffordable for many people. This can occur due to high demand or investor speculation. Betting against a real estate bubble involves foreseeing a decline in home prices. This can be achieved by selling a home in the area or purchasing put options on a home. When demand for housing surges, it often indicates the formation of a bubble. However, housing markets also undergo periods of low demand and price falls. It is vital to base investment decisions on cost-effective estimations and fundamental analysis.

Overvaluation and Potential Risks

According to a recent Fitch Ratings report, home prices in the United States are overvalued by an average of 11%. Certain cities, such as Boise City, Austin, Ogden, Las Vegas, Atlanta, Phoenix, Provo, and Fort Myers, have a higher percentage of overvalued home prices. Understanding long-term trends can provide insights into the future direction of housing prices.

Shorting the Housing Market

A short position involves betting on the decrease in the value of an asset during a market downturn. Traders can profit from market declines and hedge their exposure. Shorting a real estate ETF enables investors to bet on a downturn in the housing market. Similarly, short selling REITs can be profitable when their value drops. Investing in REITs is a common method for speculating on the housing market. However, it is important to conduct thorough research and due diligence before shorting any asset.

Understanding the Real Estate Market

The real estate market is dynamic and influenced by various economic, political, and social factors. Its performance is driven by supply and demand dynamics, as well as the availability of financing options.

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Equity REITs

Commercial real estate investment trusts (REITs) own and manage income-producing properties such as office buildings, shopping malls, and apartment buildings. An equity REIT specifically focuses on buying commercial properties and renting them out. Investors can profit from dividend yields and benefit from the financial and emotional advantages of investing in REITs. Companies operating as equity REITs are publicly traded, allowing investors to buy and sell shares. Dividend yields from equity REITs are typically higher than other investments as they are required to distribute at least 90% of taxable income to shareholders.

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