As the market stabilises, commercial real estate valuations are dropping, making it a tempting
market for buyers.
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The most considerable risk for commercial property owners is rising interest rates and weakening covenant ratios. This might explain why some owners are choosing to sell off. The difference between now and the global financial crisis is that banks are better at dealing with property finance.
Covenant breaches were enforced during the global financial crisis, triggering a spate of discount selling. While that isn’t the case now, it’s still a good time to buy if you can find the right market.
Do your research
Before you take the plunge, you need to do research! There are various things to look out for when viewing a potential investment opportunity in commercial real estate. For example, if you are viewing an office building, you want to keep your eyes peeling for cracking walls because this could suggest an underpinning issue with the foundation. That is a much more severe issue than peeling wallpaper or bubbling paint. Though, those could also be indicative of a more significant issue, such as dampness.
There are sure telltale signs of a poor investment, and these are typically the buildings that look great at first glance. There aren’t any visible issues with the building itself, but on further investigation, there is a low traffic, poor amenities in the surrounding area, or the building was erected on controversial or contested land.
There are also bad neighbourhoods, public transportation, transportation links, and property taxes. You might also want to consider crime rates, depending on the commercial property you are looking at.
Investment options
As important as it is to research the properties, you also need a clear picture of your investment budget and your goals for return on investment. Be sure to factor in professional fees, taxes, the cost of construction or repair, compliance costs, maintenance and operational costs, waste management, and mortgages.
Commercial property is often a more expensive investment opportunity, much of which is due to the bank’s willingness to lend. Banks lend a smaller percentage of the property’s value versus residential real estate. So, if you’re still determining when it will generate enough profit or have to tap into your life savings to make the purchase, it’s too expensive, and you should move on. If the math isn’t math-ing, walk away.
More good news for investors is that the cost of construction and building materials has soared throughout 2020 and beyond. While you expect that to continue throughout the fourth quarter of 2022, we should see a drop as we enter 2023. This is also good news for availability, with many building materials becoming much more accessible to the source.
Location and purpose
Of course, location is another major factor in commercial real estate. Whether you invest your hard-earned cash in an office building or a retail space, you need to know you can fill it with tenants. So, look into the area to see how other businesses perform and determine the turnover rates and rental yields. Remember to consider the value of seeking professional knowledge.
Enlist the services of a reputable commercial real estate agent to provide you insight into local areas.
Additionally, most commercial properties are sold with a specific purpose, so be sure you know what type of property it is and its purpose. For example, offices can only be utilised as offices. However, retail space can be rented out to stores, supermarkets, warehouses, and shopping centres. Factories or warehouses can utilise industrial space, and in the leisure industry, there are bars, restaurants, gyms, and hotels.
There is also a growing interest in gas stations, as the rise of electric vehicles makes it a future-proof business as gas stations embrace electric charging stations. Healthcare property, student accommodation, land lease communities, and self-storage are also growth areas ripe for investment.
On top of sub-letting options, consider factors such as parking, business flexibility, and transportation links. Commercial property is an incredibly profitable investment if you have done your research and purchased the correct property. If you plan to redevelop, you will require permits and permission, so that’s something to consider as you begin your search.
