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What Should Investors Consider When Purchasing Commercial Real Estate?

Nathan Stanogias 22 May 2019

Purchasing commercial property has its challenges.

Even for the most seasoned investors, there will always be questions about the feasibility of their next commercial real estate (CRE) investment, and whether the property is the right fit for the wider portfolio.

Taking on complex investment strategies that are built around commercial property takes time, experience and research. And if you ask the right questions and think critically about your potential investments, you will work towards discovering everything you need to know about your next big ticket CRE investment.

NOTE: We have over 120 articles and resources online to help commercial real estate investors make informed decisions.

What should you consider when purchasing CRE? Here's our full guide.

Why is the owner selling in the first place?

You may not think this should determine whether you end up making a purchase, but it’s more important than investors may think, particularly in the initial stages.

By uncovering the exact reason the seller is putting their property up on the market will be able to assist you in your negotiations. It can also help to uncover any potential red flags, too.

And being diligent is key here – getting to know the seller, their intentions, their background (and maybe even learn about their own investment strategy) to get the full story behind why the property has hit the market.

What is the end-to-end yield?

Generally speaking, a commercial property investment is as good as its rent income and therefore its overall yield. You’re not going to purchase a commercial property – whether an office, a retail shop or a factory – to merely flip it.

We’re not talking about domestic dwellings – commercial property is a long play investment and one that provides landlords with a good return on their investment (ROI).

Ask the right questions and look at historical numbers to get a well-rounded understanding of the income the building has generated over the years for the seller. Are they selling because yield is low? Discover these things – they're crucial to your success post-purchase.

TIP: Learn more about the weighted average lease expiry (WALE) here, so you can apply it to your investment strategy moving forward.

Find a market that fits your investment strategy and know the commercial real estate market trends

Setting out a clear commercial real estate investment strategy builds out your portfolio, and your portfolio is essentially your investment 'brand'.

Finding a market and an asset class that fits your investment brand is good practice: for example, if your investment strategy is to own property that has historically served retail tenants, such as brick and mortar shop fronts on a main street, perhaps you may start to look at the industrial asset class instead, as retail tenants are now seeking out alternative spaces. This is due to a lot of modern retail businesses taking their operations online, which in turn means they are seeking out spaces such as factories to house their inventory.

Assess whether trends such as the shakeup of the retail asset class affect your investment strategy and then make a call. If you don’t keep up with the industry trends, you won’t be able to make the right decisions to align to your investment strategy. Read up, research deeply, and subscribe to industry blogs to be in the know.

Seek out properties that have blue-chip tenants

One of the often overlooked strategies is to find commercial properties that have high quality tenants.

That is, more thoroughly, you want to know before committing to a purchase that existing tenants pay their rent on time, are rarely in arrears, and have a sound and liquid business. If things aren't adding up, it may not be a sound investment.

What about the structure of the building?

This matters a lot. There’s a lot riding on your investment, and if the building you’re about to purchase is rigid and doesn’t allow for future (or existing) tenant customisation and remodelling, then that severely limits the ceiling of your investment. 

If you can’t attract and retain those blue-chip tenants that are so valuable, you can almost say goodbye to a robust CRE investment.

What about external factors that investors can’t necessarily control?

Like any real estate investment, a certain level growth is driven by demand. And these things are affected by economic changes, population growth, and industry trends.

Economically speaking, low interest rates will support steady demand for commercial property and then the borrowing to purchase it, but on the other hand high interest rates would likely reduce demand for commercial real estate, as everything else inevitably will rise its costs.

Other external factors, such as infrastructure projects, demographics and population growth all influence the demand and affect the appetite for particular commercial properties.

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