There’s so much information out there giving top investment advice in the residential real estate market. It’s on TV, in the media, and there’s an abundance of articles and blogs online, but little is said about potential commercial real estate opportunities and what to look out for.
When we write about commercial property, we’re talking about office space, retail stores, industrial units and warehousing; basically any building or structure suitable for operating a business. This of course means that commercial investment opportunities vary greatly in size, location, and cost; but importantly, also in risk and return.
Return on Commercial Property Investment
Whereas residential property investment is generally regarded as a low risk strategy, the commercial property market is viewed as carrying a higher risk. However, this increased risk is coupled with an elevated potential return, usually averaging around 8%.
The Common Risks associated with Commercial Property Investment
The most common risk associated with commercial property is high vacancy rates. Whereas a residential property may take a few weeks to find a new tenant, securing a new lessee could take months. The potential quality of the lessee can affect the risk associated with commercial property investment. For example, blue chip lessee’s and government departments will reduce risk levels as they will usually rent the premises for long periods and never default on payments.
Lease Duration with Commercial Property
A business generally needs a long term location from which to operate and doesn’t want to be renewing every year like most residential leases. Moving house is usually costly and fraught with stress, but expenses associated with moving a business are commonly much higher. Therefore lease durations are commonly 5 years, with the option to extend afforded to the lessee. This means that although it may take longer to acquire a lessee than a residential tenant, they are usually locked into a contract for much longer. In addition, even if the lease is for 5 years, rent can still be negotiated on an annual basis. Finally, unlike a residential lease which can be around 10 pages, a commercial lease can be over 50 pages in length – it’s all in the detail.
Commercial Investment Success relative to Economic Performance
Whereas the residential property market is seen as relatively stable, the commercial market can be volatile. Everyone needs somewhere to live, but businesses can go under and vanish from the map. If commercial property is no longer desirable in an area, hard times could lie ahead if businesses begin to relocate. Commercial investment value is reliant on a thriving economy, and losses can be hard felt if an industry up moves because their business will perform better elsewhere.
High Initial and Ongoing Costs
Purchasing commercial property usually requires a higher initial outlay than its residential counterpart. Office space in the CBD is premium square footage and is priced as such; even shared entrances, janitors’ closets, and toilets are accounted when costing for rental. Similarly, associated maintenance costs are much higher than with residential real estate; however these are rarely the responsibility of the property owner. In addition, other ongoing costs which are usually paid by a landlord of residential dwelling are not the obligation of the commercial property owner, such as taxes, rates and maintenance, which reduces outgoings significantly.
If considering commercial property as an investment option, there are companies out there with expertise and local listings. Try commercialVIEW.com.au if looking for commercial opportunities in Australia, Colliers in the USA or MoveHut if in the UK and find the right commercial property investment for your business.