What to know when investing in commercial real estate.
Commercial real estate is increasingly growing as a prospective real estate investing sector for many people, primarily because it generates high profits. In most cases, you can get better returns with commercial properties than with residential properties due to the passive income from long lease contracts.
That said, investing in commercial real estate still comes with risks, much like any other investment. Thus, before you get excited and jump into this space immediately, take your time to learn about the mechanics of commercial real estate (CRE) investments. Get to know the important factors like what, when, and how much to invest in so that you can maximize your returns.
Knowing the market is a must when making any investment. Before you invest in commercial properties, you should look at the latest trends to know what properties will have the most investment potential. For example, some of the notable trends observed in the commercial real estate industry recently include:
- Higher office vacancies
- Increased adoption of technologies
- High demand and low supply
- Greater emphasis on environmental, social, and governance (ESG) elements
- Abundance of available capital
There are many property types to consider when making a CRE investment. Some perform better than others, so it is important to know how each sector performs in the market.
Generally, the main asset types can be broken down into office, retail, industrial, multifamily, and special purpose. However, given the present situation with the pandemic, industrial properties are performing the best since more businesses are transitioning into eCommerce channels and looking for bigger warehouses and stockrooms.
Conversely, retail is the worst-performing asset class since the rise of online shopping has led to the closure of many physical stores. Offices are somewhere in the middle–there is generally less demand for office space due to the prevalence of remote work, but now that restrictions are slowly easing, some companies are also preparing to return to the office.
When investing in commercial real estate, it is equally important to know the market dynamics based on the area you are looking at. While some industry trends apply to the general market, there are also differences in supply and demand for every geographic area.
Many first-time investors overlook this fact and end up relying solely on the macro-trends, resulting in poor investment choices. To avoid this, you should research the market in your local area and look at things like vacancy rates, the amount of rentable space, and upcoming developments or projects.
Try to look for opportunities like undersupplied properties in the area and see if there is investment potential based on the demand and forecasts. Working with a real estate agent will be particularly handy in this regard since they have a good grasp of the local property market.
Like the previous factor, local demographics will also be a critical factor to consider when assessing the potential of commercial real estate in Pinellas. Aside from understanding the geographical landscape of the area, you must also look into demographics like the population density, race, religion, and age of people living in the locale.
For example, if the population is steadily growing in a particular neighborhood, this could signal a good potential for investment. Conversely, if the area is more popular among the younger generation, you must consider their purchasing power. In most cases, the younger demographic may have fewer savings and financial stability, so consider this before you start investing in commercial real estate in the area.
If you already have experience in real estate investing, valuation should be familiar to you. It is a key factor to consider in real estate since
Risk is inevitable in any investment, but the level of risk will vary for every case. With CRE investments, the same logic applies. Each commercial property is unique, so you must assess the risk carefully before pushing through with the investment.
A key part of the risk assessment will be conducting your due diligence, which entails reviewing the condition, financials, and documents of the commercial property. Some things you should investigate include:
- Property Condition
Inspect the property thoroughly before purchasing it. Look at the integrity of the structure and the interior to assess the condition. If you need to make some repairs before leasing the space, consider how much it would cost and whether it would be worth the investment.
- Tenant Leases
Check out the property’s current tenants and look at the length of the lease and the rental prices. If tenants are currently paying below the average, this signifies an opportunity to earn more passive income by increasing rents.
- Tenant Demand
Another thing to consider is whether there is substantial demand for rentals. For example, if you plan to lease out a retail space, you need to ensure the place is not substitutable by eCommerce.
Many retail businesses are now focusing on selling online, so they will only rent a physical location if it allows them to provide something they cannot do online. One case would be companies venturing into experiential marketing. A physical location will be needed to execute such plans.
- Existing Litigations
While inspecting a property, make sure you investigate outstanding liens or litigations, if any. The last thing you want is to invest in commercial real estate, only to find that you need to deal with legal issues and spend more money to resolve them.
Commercial real estate investors often undertake redevelopment and conversion projects to repurpose a property or space into something with more investment opportunity. If this is part of your plans, you should also take the time to investigate the local zoning regulations.
Get to know the rules you need to comply with in case you plan to do any construction. Then, calculate the potential costs you may have to spend to get the necessary permits and approvals. Similarly, map out how long it will take to get all these to estimate when you can finish your plans.
Investors often forget to do this and run into problems later, so make sure to consider it early on since you can only start earning after completing the project.
Understanding your financial position is always important when investing in commercial real estate. You need to know whether you can invest first, and how much you can afford to shell out.
Having an organized budget and plan will be critical to ensure that you do not spend beyond your capacity or take out too big of a loan. It also allows you to filter out what properties will be most suitable for your portfolio and where you should focus your research on.
Ultimately, it will be useless to enter any investment if you do not have a solid financial plan. Instead of enjoying returns in the long term, you may end up losing more.
Build Your Commercial Real Estate Investment Portfolio Today
If you are interested in venturing into commercial investments, working with a knowledgeable agent will be best to help you get acquainted in this space. Antonio Maccaroni can help you analyze the market and explore your options, whether commercial property or real estate investment trust (REIT).
Give him a call today to start investing in commercial real estate properties.