Points to Consider Before Investing in Commercial Real Estate
CRE continues to gain popularity as an alternative investment class. However, not all commercial real estate ventures are created equal. Success or failure in this domain hinges on understanding timing, asset, and how you’re going to invest. Here are a few considerations to keep in mind before venturing into commercial real estate.
1.) Diverse Property Types
Commercial real estate encompasses a wide array of asset types, ranging from industrial and office spaces to retail, multifamily, and special-purpose properties. Beyond these, there are niche categories like self-storage, medical facilities, elder care, land, and hotels. Each property type exhibits varying supply and demand dynamics, yields, and overall profitability.
It is crucial to recognize that not all sectors perform equally. Presently, industrial spaces outshine others, while retail spaces face challenges due to the surge in online shopping. Understanding the performance of each asset class in the current economic climate is pivotal before deciding where to invest.
2.) Grasping Market Cycles
Acknowledging the transient nature of economic conditions is crucial in commercial real estate. Economic health, unemployment rates, and GDP directly impact the profitability of CRE. Understanding market cycles helps in avoiding investments at market peaks and selling during downturns. Identifying indicators of various market cycles enables more informed investment decisions.
3.) Market Dynamics and Supply-Demand Balance
Every commercial real estate market operates in its unique way, influenced by specific supply and demand dynamics. What may thrive on a broader scale might face oversupply issues in a particular city, and vice versa. Comprehensive market research is indispensable to identify potential risks associated with market saturation. Begin by analyzing the market’s supply within your local vicinity. Evaluate both the existing rentable square footage and any additional square footage resulting from ongoing and upcoming developments.
4.) Contingency and Capital Reserve
Uncertainty is inherent in any investment. To mitigate unforeseen circumstances, incorporate cost contingencies into your initial acquisition costs. These funds provide a buffer for unexpected expenses during property improvements, leasing, renovations, or rezoning. Additionally, establish a capital reserve or replacement reserves fund for long-term improvements or unforeseen expenses beyond initial capital improvements.
5.) Thorough Due Diligence
The due diligence period is an opportunity to scrutinize the investment thoroughly. Whether it involves reviewing financials, tax returns, profit and loss statements, or conducting surveys and property inspections, due diligence is a crucial step to avoid costly oversights. Passive investors engaged in real estate investment trusts (REITs), partnerships, private funds, or crowdfunding, should conduct thorough due diligence, encompassing an examination of the entities managing the investment. Investigate their track record, past offerings, and the diligence process they follow to ensure alignment with your investment goals.
6.) Preparing for Setbacks and Extended Timelines
Realistic timelines are imperative for success in commercial real estate. The processes of construction, renovations, leasing, and implementing new systems each require a significant amount of time. Anticipate setbacks during your due diligence and incorporate them into your contingency plans or prepare an action plan to address delays.
Venturing into commercial real estate demands a comprehensive understanding of the market, property types, cycles, and a diligent due diligence process. By recognizing the intricacies and potential pitfalls, investors can navigate the commercial real estate landscape more effectively, maximizing profitability and safeguarding against setbacks and risks.
Disclaimer: The information provided is for general informational purposes only and does not constitute legal or financial advice. Commercial real estate investment involves inherent risks, and individuals should conduct their own research and seek professional advice before making investment decisions. Past performance is not indicative of future results, and there is no guarantee of success in commercial real estate ventures. Individuals should carefully consider their risk tolerance, financial situation, and investment objectives before entering into any commercial real estate transactions. VandeWeerd disclaims any liability for any direct, indirect, or consequential loss or damage incurred by any person as a result of relying on the information in this post.
