'Get granular': BlackRock says not all commercial real-estate is risky - and touts industrial properties as the next opportunity for investors

• Not all commercial real-estate assets are risky, according to BlackRock, the world's biggest asset manager.
• There's opportunity in industrial properties thanks to structural trends fueling long-term demand, strategists wrote.

Not all corners of the commercial real-estate market are risky, according to BlackRock.

In a weekly commentary published on Monday, strategists at the world's biggest asset management firm touted industrial property as one that offers an attractive investment opportunity.

"Financial cracks have fed concerns over commercial real estate's outlook. We're cautious on the sector. Yet we go granular in our portfolio views. We see better value in real estate sectors that may see long-term demand, like industrial," the team led by Wei Li, BlackRock's global chief investment strategist, said.

The commercial real estate (CRE) industry has come under pressure this year as it faces headwinds including high interest rates, tighter lending standards, and work-from-home trends. On top of that, there's a huge impending rollover of debt that was initially financed at a time of low interest rates.

The combination of these issues have heightened investor fears of CRE loan defaults and falling commercial property prices that could ultimately fuel a US recession.

Even the Federal Reserve's own experts have sounded the alarm on the commercial property sector in its Financial Stability Report, saying the central bank has ramped up its monitoring of the performance of CRE loans and expanded examination procedures for banks with significant risks tied to the sector.

But BlackRock is of the view that "commercial real estate is not a monolith", and there are pockets of value in the sector that offer a combination of relatively low risk and potential for gains.

"We favor selected sectors such as industrial real estate as we see long-term forces like e-commerce and geopolitical fragmentation fueling demand," the team said.

"Industrial assets – referring to warehouses used for distribution, manufacturing and research and development – have fared better than office. Industrial assets have a vacancy rate around 2% as of March and their share of the commercial real estate market has doubled since 2016 to take up roughly a third of the market now, according to NCREIF data. This differentiation is why we get granular," they added.