How Do I Choose The Right Investment Property?
Is All Commercial Real Estate Good To Own?
Investing In Commercial Real Estate
There is a lot of commercial real estate and it varies greatly in style, use, size, location, and cost. It also varies in investment potential. “…varies in investment potential…”? Yup. Success potential in investing in commercial real estate varies due to this diversity in the real estate itself and the investor’s approach to investing.
What’s in an approach? Investors should view themselves as a business. The product of the business is the real estate the investor (the business owner) offers for rent or sale. The investor’s customers are the tenants or the buyers seeking the investor’s real estate. Why think like a business owner? Because this is a business where the investor needs to offer a product for which there is consumer demand.
Simply buying any available commercial real estate doesn’t ensure profitable business potential. Another way to view this is, just changing the name of the owner on the deed doesn’t improve the property’s potential. There must be consumer demand for the property, that is demand from tenants or new buyers. So, just like starting any business, successful business owners start by verifying there is consumer demand for the type of product or service they want to provide. For real estate investors, that is verifying there is tenant or new buyer demand for the real estate the investor intends to acquire.
Consumer demand varies by location and it changes over time. New industries arise and expand. Some industries degrade or even disappear altogether. Business styles increase and decrease in the same manner. For example, with the advent of online shopping, many brick and mortar retail businesses are struggling and many have closed down. As a result there is a lot of multi-unit complexes, like old shopping centers, with low occupancy. They were built to attract consumer demand as it was decades ago. Many food businesses are increasingly catering towards consumers who order for delivery rather than visit in person. Online ordering for quick pick-up is on the rise, too, for food and beverage businesses. This transition means many food businesses can operate successfully with smaller spaces and decrease their operating costs, and this means they look for a different style of real estate than they would have in previous years. These are just a couple examples.
As part of the investor’s plan, a thorough analysis of the markets and market trends, specifically consumer demand and competing commercial real estate, is critically important. For example, in recent years there has been a growth in the medical industry with new medical centers and health-care service providers. This industry requires a lot of real estate in new locations and sometimes of a particular style and zoning. Other industries that have been expanding are fitness, entertainment, distribution/transportation, and gas stations. Many individual communities will have their own local industries as well, and examples of these are sports and recreation facilities, ethnic markets, and specialty food & beverage businesses.
While there may be some as-is commercial real estate that will be in demand, often existing real estate needs to be refreshed or repurposed so that it meets the needs of the current consumer. Resultantly, the investor’s plan should also provide for improving the product – the real estate – so that current consumers will want to rent it or buy it. This is a very important consideration. This is how the investor-business owner forms and eventually offers a product in their real estate that consumers will want.
Let’s talk about property management. Why? This is where investors, as the new owners of the rental real estate, can make or break their investment. Simply having leases with tenants doesn’t assure revenue stability for the investor. What if the tenants’ businesses fail? They can’t pay their rent. The leases are terminated. New tenants may be hard to find. The rule I suggest to investor clients is to help their tenants succeed. This is an investment of effort for their tenants’ success that equates to reliable rent payments. For example, refreshing the property grounds, usually referred to as “common areas”, so it is attractive to customers can increase and maintain a customer base. Support tenants with interior maintenance has the same effect. If the property is a multi-unit complex like a shopping center or a business center, promoting the complex can have significant value. Occasionally the investor may need to address zoning issues and similar matters to mitigate hindrances to business operations.
Here are a few items that investors should research when identifying prospective commercial real estate to purchase:
Intended consumer market to target for tenants and/or buyers
Regional industry, economic, and residential trends
Zoning
Local laws and politics that may hinder or enable businesses
The municipality’s Master Plan
Traffic patterns
Current and future development
Competing commercial real estate
Return on Investment potential
Types of leasing for tenants
Current and historical tenant occupancy
Advertising strategy for tenants and/or buyers
Property management plan
Refresh/Renovation plan
Property inspections and studies
Investing in commercial real estate can be exciting and rewarding. It can also be risky. A real estate brokerage can help with education and advice on real estate transactions, research and studies, property evaluations, negotiations and contract preparation, property management, and much more.
