eXp Commercial is one of the fastest-growing national commercial real estate brokerage firms. The Chicago Multifamily Brokerage Division focuses on listing and selling multifamily properties throughout the Chicago Area and Suburbs.
As you may know, increasing the Net Operating Income (NOI) of any commercial property will not only increase your cash flow but also increase the value of your property since the value is determined primarily through NOI and Capitalization Rates (quick refresher on how to calculate the value of the commercial property).
We obviously have no direct control over cap rates, so we’re left chasing NOI.
There are literally countless different ways to increase the income on your multifamily property, and it would be impossible to list everything. But I’ve put together a list of 29 ways to increase Net Operating Income (NOI), from the super simple to the creative.
There are three basic categories where you can squeeze some extra income: maximizing current revenue streams, decreasing costs, and finding new sources of revenue.
Increase NOI by getting the most out of your current income streams
Bring your rent up to market rates. There are many ways to determine if you are at the market rates (comparing to other properties, getting input from professionals, market surveys, etc.), but the best way is to look at your vacancy. If your property consistently runs well below the market vacancy rates, your rents are probably too low.
Adjust your fees. It’s important to check your fee schedule against your actual costs consistently and against your competition. You don’t want to eat costs that the resident should be paying, but you should also look at the competition to see how their fees compare.
Consider remodels that let you charge a premium. A solid interior renovation package usually charges you a premium for non-renovated units. Also, it would be best if you considered adding amenities to the unit, such as a dishwasher or washer/dryer hookups. Occupants are much more likely to choose an apartment with these upgrades, which increases demand for your units which translates into higher rents.
Laundry. Are you giving free washers and dryers in your apartments? It’s time to consider putting a coin-op facility in your building, charging a fee for the laundry machines, or increasing rent. People are willing to pay for the ability to do laundry in their apartments, so you should charge for it.
Reducing Costs Can Dramatically Impact Your Net Operating Income
Reduce (or eliminate) rent concessions. Many owners have higher rents but then offer a bunch of concessions to get people to sign. This is problematic for two reasons:
People decide to tour the property based on the advertised rent. So, high rents with many concessions mean fewer people will show up to tour the property (meaning higher vacancy).
Most of the time, you don’t need a rent concession to close the deal. It means you’re just giving away money. Instead, use a discount during negotiation to close the deal only once you’ve determined they are a perfect applicant and you’re positive they will walk away.
Control bad debt. Evictions, sudden move-outs, and damage can all lead to uncollected debt. Chances are, you’ll never collect from the people who cause these issues, so it’s just best to avoid them in the first place. You can avoid these issues by implementing a stronger tenant screening process which will weed out more of the bad guys.
Reduce water usage. Water is one of the biggest expense categories for most properties. Reducing this will dramatically affect your NOI.
Install low-flow toilets, showerheads, and aerators. This can reduce the residents' water consumption by 30% or more.
Install sensors for your irrigation system. Have you ever seen someone watering their lawn during a rainstorm? Well, let’s avoid this.
Convert some landscaping to xeriscape. Landscaping with water conservation in mind can reduce water consumption dramatically.
Requote your insurance. According to Kimberley Stallings, a multifamily insurance expert and owner of Heritage Risk Advisors, you should get your insurance requoted every few years. Carriers are always changing their appetites and filling their capacities; simply auto-renewing your policy may cause you to miss out on premium savings and coverage enhancements.
Challenge your property taxes. Many municipalities over-assess properties hoping the owners won’t challenge their assessment…and many people never challenge. Instead, it would be best if you made it a habit to contest every assessment yearly (unless they reduce your assessment).
Save on electricity. Install energy-efficient fixtures and bulbs; LED lighting can easily use 80% less energy than standard lighting. Light sensors and motion sensors can also reduce your energy consumption.
Consider adding recycling. This usually costs nothing (or next to nothing) to implement, but it can significantly reduce the amount of waste your residents generate. Less waste means smaller dumpsters or fewer pickups, which translate into savings for you.
Get new bids on services. You’ll often get comfortable working with one contractor or company providing a service for you. Although loyalty is important in any business, the cost of those services is even more important. Consider rebidding every service you receive, including HVAC, plumbing, electrical, trash, locksmith, etc. You can use your bids to negotiate down your preferred vendor or switch and try a new one.
Reduce tenant turnovers. Offer an incentive to the resident when they show their intent to move out. Calculate the cost of a turnover to you and make sure the incentive costs less than the turnover cost. Also, according to Denise Supplee, the Director of Operations at Spark Rental, you can offer longer leases at a lower rate. Even though you may earn a little less, it can be offset by having less turnover.
Reduce turnover time. Systematize your turnover process to reduce the time between tenants significantly. Having an inspection and repair process could reduce turnover time significantly. Don’t forget to let tenants move in early and pro-rate the rent to reduce your vacancy further.
Reduce turnover costs. According to Josh Rosenthal at Movin. Space, a site that offers free move-in inspection documents for tenants, unclaimed damages at move-out are a major source of lost revenue. By having a well-documented walk-through process at move-in and move-out, you can avoid conflicts and disagreements on what damage the tenant caused.
Find new sources of revenue to maximize the value of your multifamily property.
Utility reimbursement or RUBS. This is the biggest and easiest item to generate new revenue. If you operate as an all-bills-paid property, it’s time to join the trend and start charging back utilities. Not only will it generate more revenue, but it will cause the residents to conserve more which is good for you and the environment.
Leasing washers/dryers. A lot of people don’t want to use a laundromat but can’t afford to buy a washer and dryer. Offer to rent them to the resident.
On-site storage. A lot of people have a lot of things and nowhere to store them. Consider adding some storage units to the site if space permits. Residents will love the convenience, and so will your bottom line.
Reserved parking. Heath Silverman, CEO of Stessa, suggests finding value in buildings with unmarked parking areas. You can “immediately divide the lot as efficiently as possible, draw lines, number spaces, institute parking rules, and start charging for spots when it makes sense.” If there is ample space for parking, consider allowing some to pay for reserved parking right in front of their door to increase your NOI.
Covered parking. Similar to reserved parking, you’ll provide overhead cover for their vehicles, protecting it from rain, hail, and the sun.
Cell tower leases. If you’re in the right place, you may be able to lease a rooftop or part of your land to provide a cell tower. A telecommunications lease is not as crazy as it sounds to increase NOI.
Add a billboard. If you’re on a heavily trafficked road, you may want to consider adding a billboard. If you don’t want to install the infrastructure yourself, companies out there will lease the land from you and take care of the rest.
Vending machines. A vending machine business may be willing to pay you to install food or drink vending machines on your property.
Valet trash. You could offer to collect trash from the resident’s doorstep for a monthly fee.
Short-term or furnished rentals. Mark Kenney, a multifamily syndicator and founder of Think Multifamily, suggests renting your model unit or other furnished units daily to the resident’s friends and family. He’s recently implemented a trial program at one of his properties. He said, “These short-term rentals are very low risk since it’s limited to the friends/family of current residents, but it can significantly impact your bottom line.” You could expand upon this idea in several ways, so get creative.
Pet rent. It’s pretty standard in most places to charge for pets. If you’re not doing it, check your competition and consider implementing it.
Get creative and find new ways to increase your NOI
As you can see, there are dozens of easy ways to increase your NOI. It may not be realistic for you to implement every single line item in this list, but there is no reason why you shouldn’t pick a few and put them into place immediately.
The best thing you should do is estimate all the different revenue streams and different ways to decrease expenses and punch them into your deal calculator.
Then you’ll get a good handle on how the changes affect your overall NOI.
When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.
The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’
Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?
So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.
There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.
However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?
As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.
Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:
Multifamily rents cooling off at last? Compared to previous years, according to a new report by Apartment List.
While prices remain up 5.5% year-over-year, they fall behind the Illinois average of 6.6% and outpace the U.S. average of 4%.
This 5.5% growth increase seems high, but it’s significantly slower compared to what the city experienced at the same point about a year ago: 15.5% from January to December 2021.
Not to mention, Chicago rents decreased 1.1% in the past month, compared to the national rate of -0.8%. This ranks No. 69 among the 100 largest metros in the U.S., based on the report. Surprisingly, Paradise, Nevada ranked No. 1 for month-to-month rent growth (2.3%) and New York City ranked No. 100. (-3.0%).
Apartment List also found Chicago to be No. 56 in terms of the most expensive large city in the U.S. The median rent is currently $1,277 for a one-bedroom apartment and $1,386 for a two-bedroom, citywide. Across all bedroom sizes, the median is $1,375. The median rent across the nation as a whole is $1,153 for a one-bedroom, $1,321 for a two-bedroom and $1,344 overall. This means the median rent in Chicago is 2,3% higher than the national and similar to the prices you’d find in Durham and Fayetteville, North Carolina.
Zooming out a little further to include the wider metro, Apartment List found the median rent to be $1,360, meaning the median price in Chicago is 1.1% greater than the price metro wide. But Chicago isn’t the most expensive city in the area: Naperville is currently the most expensive, with a median rent just short of $2,000. Conversely, Waukegan is the most metro’s most affordable city, boasting a median rent of $1,262.
Record inflation means that nearly all consumer products cost more today than they did a year or two ago. Utility costs are no different. For example, electricity prices nationwide have jumped 7.5% since last year – and they’re expected to continue climbing.
Utility costs represent a major expense for landlords. This is especially true at multifamily apartment buildings where base rent often includes utility costs. When landlords must incur these costs, the cash flow impacts can be substantial.
In this article, we will look at what’s known as RUBS -or a ratio utility billing system. Implementing a RUBS program is a common way owners pass utility costs on to their renters.
What is a Ratio Utility Billing System (RUBS)?
Many properties are originally built with only one set of utility meters. The one set of meters measures electricity, gas, and water usage for the entire building.
A RUBS program is a way of allocating utility costs to tenants without submetering each unit.
In a single-metered apartment building, the landlord covers all utility costs and charges a premium rent to recover those costs. Instead, an owner can submeter the property so that each unit has its utility meters.
However, submetering can be costly and, in many cases, inefficient. Instead, owners may consider implementing a Ratio Utility Billing System – or RUBS.
A RUBS program is a way of allocating utility costs to tenants without submetering each unit. Instead, each tenant pays a certain portion of each month’s utility bills using some pre-set formula.
How to Calculate RUBS Payments
RUBS considers several factors, such as unit square footage, number of bathrooms, presence of washers/dryers, and unit occupancy. (The more sophisticated RUBS programs even submeter irrigation to pass those water and sewer costs on to tenants!
It’s important to understand that no one RUBS formula is used to account for total utility usage. Instead, each utility generally has its formula.
The gas bill may vary depending on whether the unit has a gas fireplace, gas stove, gas heat, or gas dryer.
Electricity bills include the number and type of light fixtures, electric stoves, electric heating, and electric washers and dryers.
Here is a simple example. In a 20-unit apartment building, Unit 101 might be assigned a RUBS ratio of 4% if the total water bill for the property is $1800 that month. The tenant would be responsible for $72 toward that cost ($1800 x 0.04).
Unit 202 might be larger and, therefore, may have a RUBS ratio of 5.75%. In that case, the tenants would be responsible for $103.50 toward that cost ($1800 x 0.0575).
Similar calculations would then be made for each of the monthly utility costs.
Top Reasons to Implement RUBS System at Multifamily Properties
1. Increase Revenue
Any operational cost that is passed through to tenants is essentially saving owners money. At a 300-unit apartment building, for example, the annual water and sewer savings can top upwards of $70,000.
A RUBS program is a very effective way for owners to preserve their cash flow and increase their net operating income.
Let’s say utilities represent 20% of an owner’s operational costs. Depending on the size of the property, that 20% can translate into thousands of dollars in savings.
A RUBS program is a very effective way for owners to preserve their cash flow and
increase their net operating income.
Of course, landlords who implement a RUBS scheme may have to adjust their rents accordingly. Owners should factor this in and be sure there is a sufficient delta to justify using RUBS.
2. Avoid Costly Submetering
Ideally, the properties would be sub-metered at the time of construction. Unfortunately, this often isn’t the case. Owners who want to pass through utility costs to tenants can either submeter each unit or utilize a RUBS program.
Submetering is complicated and can be capital-intensive. Each submeter can cost upwards of $750 to install. In older buildings, especially those with several pipes feeding a single unit, retrofitting to the submeter may be extremely expensive.
Submetering can also disrupt tenants simply because their utilities must be turned off during installation. Tenant satisfaction is always an important consideration.
3. More Stable Cash Flow
Fluctuating utility prices can disrupt an owner’s original cash flow projections. For example, a 10% increase in electricity costs will quickly eat away at revenue if the owner incurs those costs.
Of course, multifamily owners can increase rent to accommodate higher utility costs. However, most tenants are on year-long leases, meaning landlords must wait until the lease expires to increase rents.
A tenant may opt not to renew their lease if rent increases are significant. Unit turnover can also cut into the cash flow of an owner.
A RUBS program ensures more stable cash flow from month to month and year to year.
4. Easier to Market Units for Rent
Some people will only look for apartments listed within a certain price range. Multifamily owners utilizing RUBS can charge lower base rent, attracting a larger audience. They can then turn around and boost revenue on the back end by passing utility costs on to their tenants.
5. Forced Appreciation
Because commercial values are largely based on net income. It is the properties with higher NOI that are considered more valuable. RUBS can increase multifamily NOI and in doing so, creates forced appreciation based on a simple cap-rate calculation.
Why RUBS is a Good Hedge Against Inflation
Economists often debate whether rising energy prices contribute to inflation or vice versa, whether rising inflation causes energy prices to surge. In any event, both are currently on the rise.
One way to offset higher utility costs is by implementing a RUBS strategy. With this strategy, utility costs become a variable expense, meaning that when costs go up, someone else pays the difference.
A RUBS system allows multifamily owners to pass these higher costs on to tenants, thereby saving money. Owners who have low fixed costs tend to profit as inflation rises. Owners can increase rent to account for inflation without incurring the expense of rising utilities.
How to Implement a RUBS Program at a Multifamily Building
Owners should start by assessing their property. Determining whether the current setup, a RUBS program, or submetering units would be the most cost-effective. Assuming RUBS is the solution, owners should begin reaching out to their utility providers to make this change.
Implementing a RUBS program is also a great time to have the utility company do an energy assessment of the building. This helps the owner uncover ways to improve the property’s energy efficiency. Subsequent improvements (e.g., installing low-flow toilets or ductless heating) will lower utility costs for the tenants.
It is important to give tenants notice that this change is coming. The best practice is to give tenants six months’ notice if possible. The notice should explain the new policy, its rationale, and how utility costs will be calculated and allocated. Clear communication is essential.
Implementing a RUBS program is also a great time to have the utility company do an energy assessment of the building.
Any new lease should include information on how RUBS will be used to charge tenants. It should also explain how tenants can pay their utility bills each month. This helps to prevent surprises or disputes down the road.
On the operational side. All building, unit, and resident information must be uploaded into the property’s billing system.
They should verify that all the information provided to tenants is accurate between notice to tenants and actually “switching on” RUBS. Property managers are typically the best source of this information.
Once the transition has occurred, owners should utilize their property management software to send tenants copies of their utility bills accordingly.
Additional Considerations for Using RUBS at Multifamily Apartments
Not all states look upon RUBS favorably.Before implementing a RUBS program, ensure that it is authorized at the local and government level. For instance, it is prohibited in Delaware and Miami. However, California considers RUBS payments a form of rent. Therefore, in rent-controlled communities, charging for RUBS can put owners above the allowable rent increase. In such situations, multifamily owners may be better off submetering the property instead of utilizing a RUBS system.
RUBS may not be generally accepted in the marketplaceSome nuances to multifamily investments can vary from one market to another. In some regions, for example, the Northeast. Heat, water, and sewer charges are almost always included in the rent at 5+ unit apartment buildings. Owners should carefully consider whether to proceed with a RUBS strategy in markets like these. At a minimum, check to see what local competition is doing before moving forward.
You may incur some pushback from existing tenants.The transition to a RUBS program is sometimes difficult. Existing tenants often push back on these costs if their base rent remains unchanged. Tenants may see their utilities as something they’ve been receiving for “free” which would now equate to a major cost. Some may request a rent reduction at the outset. Others may opt to leave the property entirely. As a result, a RUBS program is most easily implemented during a change in ownership. Or after an owner has already achieved more comprehensive value-add property improvements.
If tenants refuse to pay their RUBS bill, you may have little recourseTypically, if a tenant does not pay their utility bills, their utilities can be turned off. This only works when a tenant has their own separately metered utilities.
The owner cannot simply turn off service at a RUBS property since service powers the entire building. If tenants don’t pay their RUBS bills, owners may have no recourse other than eviction (another costly prospect).
RUBS doesn’t result in any significant energy savingsContrary to popular belief, the RUBS system does not generate substantial energy savings. Tenants are charged their pro-rata share of the utilities regardless of how they consume. As a result, RUBS does not encourage water or energy conservation the way that submetering does. There may be some impact at the margins, but owners should not expect a big drop-off in total consumption.
Conclusion
RUBS utility billing can help multifamily property owners add value to their buildings. Mainly by passing on a portion of their operational costs to tenants.
This increases the owner’s NOI and enhances the property’s value. It’s a cost-effective solution that all owners should explore.
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When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.
The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’
Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?
So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.
There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.
However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?
As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.
Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:
Despite the market’s uncertainty, commercial real estate performed well in 2022. With healthy balance sheets, consumer demand was significantly boosted in retail and industrial asset classes. In both sectors of the real estate market, vacancy rates fell even further than the previous year, illustrating strong demand for retail and industrial spaces in the post-pandemic period. Specifically, the retail sector experienced the most significant drop in vacancy rates to 4.2% at the end of 2022. Due to a lack of new supply, net absorption and rent price gains were substantial in the retail sector.
2023 Commercial Real Estate Outlook
However, this year will be challenging for most commercial real estate market sectors, with higher vacancy rates in the office and multifamily sectors.
After its recent record-breaking year in 2021, the multifamily sector has started to slow down in the second quarter of 2022. Demand remains solid, but net absorption dropped by 75 percentage points in 2022 compared to 2021. As a result, rent growth decelerated, and the vacancy rate increased in 2022. Due to rising borrowing costs, people may need to rent for a longer period keeping strong demand for apartment buildings. While the U.S. may skirt the recession, the multifamily sector will likely regain momentum later this year and perform better than pre-pandemic.
The future of office space is ambiguous. COVID-19 has already disrupted the “traditional office” work environment. Hybrid work is now a reality for many people, and this trend only goes one way, just like e-commerce changed the “traditional retail” sector. Thus, 2023 will be another challenging year for the office sector as this sector will continue to change to improve the occupant experience and attract more employees to return to the office. But, this may be even more difficult with older office spaces lacking modern amenities. Vacancy rates may drop even further for these office spaces.
Thanks to the rise of e-commerce during the pandemic, industrial real estate outperformed in the last couple of years. Big online retailers needed warehouses to store their products, boosting the demand for industrial spaces. Even though demand for industrial space cooled off in 2022, the industrial sector will continue to be one of the bright spots of commercial real estate in 2023. Despite the slowdown, vacancy rates will remain low, and rent growth will double due to low supply in the industrial sector.
The retail sector is expected to remain strong and perform better than pre-pandemic levels. With inflation moving down and interest rates to stabilize later this year, consumer spending power will be back this year. Specifically, growth in the brick-and-mortar stores will be driven mainly by smaller shops such as neighborhood centers. The trend is clear. Due to remote-work policies, neighborhood stores are on the rise, and this trend will continue this year. Consumers like to shop locally as these neighborhood stores offer convenience and personal interaction.
Hotel revenue dipped in 2020 due to the COVID-19 travel restrictions and self-quarantine orders, but it fully recovered in 2022. The revenue per available room (RevPAR) is 10 percent higher than the pre-pandemic level. After two years of social distancing and working from home, Americans travel again. With business and leisure time increasing, the demand for hospitality spaces will continue to grow in 2023. The year is still young.
Inflation, interest rates, supply chain, and geopolitical events are the main factors determining how commercial real estate will perform in the following months. The National Association of REALTORS® will keep you informed monthly about the developments in commercial real estate.
eXp Commercial Partners provide our clients with the best-in-class services needed to complete a streamlined, cost-effective, successful commercial real estate transaction and assist you throughout the ownership cycle, including Capital Markets, 1031 Exchange Intermediary, Cost Segregation, Property Tax and Title Services https://www.creconsult.net/partners/
The Commercial Real Estate Symposium will provide junior and senior agents and brokers with valuable insights on topics, including: international opportunities, capital and funding for small businesses in today’s market, how to attract investors, and much more.
Important: Please download the virtual eXp Commercial Campus prior to the event, and follow the instructions to login and create your avatar. Feel free to explore the campus before the event begins.
Multifamily Absorptionof unitsinthelast 12 months: 174,442 Rent growth in the last 12 months: 3.7% Cap rate: 4.9%
Rent prices are still higher than they were a year ago, but the gains have returned to more normal levels. Rent growth dropped to the lowest level since the first quarter of 2021. Rents rose 3.7% year-over-year in the last quarter of the year compared to 5.6% and 9.2% in the previous two quarters.
As elevated prices continue to hurt consumers, fewer people can afford to cover their rent expenses, decreasing the demand for apartments. After reaching all-time lows in 2021, the vacancy rate rose significantly in Q4 2022 to 6.1%.
While rents have increased in nearly all the metro areas across the county, Sun Belt areas have experienced an even faster rent growth, including Kingsport and Knoxville in Tennessee, Fayetteville, NC, Charleston, SC, and Naples, FL.
Respectively, demand for apartment buildings remains strong in big city centers such as New York and Washington, DC. In these two areas, more than 9,000 multifamily units have been absorbed in the last 12 months ending in December.
2023 Outlook:
Rent price growth won’t likely hit the 2022’s highs. Although multifamily housing construction has slowed down, the number of apartment buildings under construction is at record highs. Thus, the completion of these homes may ease rent growth.
Nevertheless, demand for apartment buildings will remain strong, considering many buyers have already been priced out of the market. Due to rapidly rising mortgage rates, buyers need to earn more than $100,000 to afford to buy the median-priced home. However, only 15% of the renters earn that income.
Read the full report covering all commercial real estate sectors
When people look for a home, one of the first things they do is hire a residential realtor. But when it comes to commercial real estate, some newer tenants and investors try to represent themselves when looking for commercial space. That’s almost always a big mistake.
In this article, we’ll look at the benefits of listing commercial real estate with a broker, how to find the best broker in your market, and six key questions to ask before hiring a commercial broker.
Benefits of Hiring a Commercial Real Estate Broker
A commercial real estate broker works with property owners and tenants to buy, sell, and lease real estate for commercial use. Compared to buying a home, where a lot of emotion is involved, a commercial agent understands that investment real estate is mainly a numbers game. The top benefits of hiring a skilled commercial real estate broker in your local market include:
In-depth market knowledge to find the best commercial property for sale, including properties just coming to market.
They represent buyers and sellers of commercial real estate – and tenants seeking to lease or sublease space – while always keeping the client’s best interest in mind.
Hiring a commercial broker is cost-effective for CRE investors and tenants because the seller or landlord typically pays fees instead of the client.
Access to commercial listing sites to quickly lease space by generating as much demand as possible from qualified tenants.
Posting available commercial property for sale on the top commercial real estate websites ensures the property is seen quickly by as many buyers as possible.
Networking with other commercial agents and local real estate experts helps locate hard-to-find property and allows investors and tenants to get the best deals on the market today.
Help clients to stay objective and focused, calmly explaining and exploring all options of a commercial real estate transaction without tipping their hand to the other parties in the deal.
Commercial real estate brokers also save clients time and money by working to find opportunistic properties to lease or invest in and hammering out the best deal by knowing what to ask for and when.
Skills to Look for in a Commercial Broker
Finding a great commercial broker is similar to looking for any other specialized service professional, such as a doctor or lawyer. Skills to look for in a commercial real estate broker include:
Expertise – Expertise in specific commercial real estate asset classes like office, retail, multifamily, industrial, or special use investments.
Experience – What they’ve done, whether representing tenants looking for space to lease or sublease or working with a landlord to lease or sell commercial property.
Network – Presence in a specific geographic area or submarket signifies that the broker has an established network of contacts and understands how deals get done and tenants and property owners work.
How to Hire a Commercial Real Estate Broker
First, determine what your specific needs are. For example, are you an investor with anchor space in a shopping center that needs to be filled, or do you own a free-standing building and seek a regional or national tenant willing to sign a triple net lease?
Next, look for a broker who only works in commercial real estate. Some agents only “dabble” in commercial estate and sell houses most of the time, which means they won’t bring value to your transaction. In some small markets, it may not be possible to find a specialty broker who only handles leasing or retail property but always look for an agent who makes their living in commercial real estate.
Third, narrow down your choices by reviewing each prospective candidate's professional designations to help choose the commercial real estate broker best for your needs. Commercial real estate practitioners with classroom and real-world experience can help clients reduce risk, enhance credibility, make the right decisions, and negotiate the best deals possible.
It also behooves you to look for brokers that are part of commercial real estate networks and organizations and hold industry certifications. Some top commercial real estate designations include Certified Commercial Investment Member (CCIM), Society of Industrial and Office Realtors (SIOR), and Certified Property Manager (CPM) from the Institute of Real Estate Management (IREM).
6 Important Questions to Ask a Commercial Real Estate Broker
Once you’ve put together your shortlist, make sure to ask these six key questions before hiring a commercial real estate broker:
When was the agent first licensed, and what type of continuing education is the agent required to take by the state and the employing brokerage firm?
How many years has the commercial agent been helping clients lease, buy, or sell commercial real estate?
What geographic locations does the agent specialize in, such as market or submarket, neighborhood, or corridor?
What type of commercial property does the broker specialize in, such as office or retail, multifamily or mixed-use, or industrial and special-use property?
What references can the broker provide from similar tenants or businesses to yours that the broker has recently represented?
For tenant brokers, is leasing or buying a better business decision based on local market trends and the amount of available space for lease?
How to Find a Commercial Broker
The commercial real estate world can be a small, tightly-knit community that can be difficult to penetrate, especially for new commercial real estate investors.
One good way to find a commercial real estate broker is to speak with tenants running a successful business in the type of commercial property you’re seeking. The tenant can connect you with their leasing agent or property manager, who can refer you to a commercial broker active in the local market.
The most successful brokers in larger commercial real estate markets usually focus on specific areas or corridors. Try driving around looking for commercial signs with the same agent name or commercial real estate firm, then contact the broker to learn more about how they work. If you like what you hear, set up a face-to-face meeting in person or with Skype or Zoom.
Remote commercial real estate investors who don’t live in the same market they invest in can use commercial real estate listing sites to find a great commercial broker. Going online to look for a commercial broker is similar to driving and looking for signs, except you can do everything online, saving time and money.
Commercial real estate brokers provide their clients with the competitive edge needed to get deals done in today’s marketplace, no matter their positioning. Tenants looking for space and buyers of the commercial property benefit from a broker’s experience and expertise, while the landlord or seller pays the commission fees. Commercial real estate sellers and landlords hire a commercial real estate broker to market and show the property, negotiate the sales transaction, and get vacant lease space filled quickly.
In 2021, the U.S. saw 91 billion dollars invested in building commercial real estate. While this is an excellent sign that the commercial real estate industry is booming, it also creates more competition for owners trying to sell.
Here are ten tips to help you get ahead of the curve to help your commercial property sell quickly.
1. Determine the Fair Market Value of Your Property
Without a professional estimate, you may be overestimating your property's value, which could deter potential buyers or leave money on the table.
Hiring an expert to perform a market value estimate is a good idea, as is gathering your market intelligence. You can find out what price other similar properties in your area are selling for. The information will be more accurate since the calculations are based on usable area, not total area. You will get a more precise overview of the price of real estate compared to your property.
2. Order Your Report Title Immediately
As soon as you know you want to sell your commercial property, call your real estate attorney and order your title. A great real estate attorney will quickly respond to your request and walk you through the steps, starting with the most complicated items. The title report can take up to 10 days to arrive, and the faster you get your title, the quicker you can sell your property.
3. Update Your Environmental Reports
If your environmental reports are more than six months old, it’s time to update them. Interested buyers want to ensure they’re not purchasing a building with potential environmental risks. So make sure your environmental reports are up-to-date, complete, and precise.
Providing an accurate report will help you in the long run because it will reduce the number of questions and doubts your potential buyer may have. Remember that these reports can take up to 21 days to arrive, so do this as quickly as possible.
4. Get All of Your Paperwork Ready
Before you list your commercial property for sale, ensure you have your paperwork ready. Not being fully prepared can deter potential buyers as they may worry about dealing with unknown issues down the road. Ensure you have your ownership papers, permits, and certifications your new buyer will need.
If you have tenants in your commercial property, you will also want to gather and organize your rent roll along with any profits and loss statements from the past two years.
Providing the buyer with a rent roll will let them know which tenants are leaving soon and which are staying for the next few years. In addition, organizing your information clearly and concisely will let your buyer know where their rental income is coming from and identify potential opportunities to increase revenues after the transaction closes.
5. Create a Service History List
Make a list of your primary service vendors, such as those dealing with window cleaning/repairs, plumbing, electrical, HVAC, elevator, fire safety, and utilities.
Include in your list extensive service history records for any repairs or replacements. Providing this information will show your buyers that you are upfront and honest while allowing them to estimate how much they need to spend on future repairs and replacements.
6. Do a Thorough Clean Out
It’s hard for a potential owner-user buyer to picture purchasing your property if it’s cluttered with unnecessary items. So go through closets, storage rooms, etc., to ensure that anything left behind by previous tenants is removed. Likewise, anything outdated or an eyesore should be removed or kept out of view.
7. List Your Property on Commercial Real Estate Websites
Commercial real estate listing websites like Crexi are a great way to promote your property and potentially sell it faster. Doing so allows you to list your property at an attractive price while broadening your chances of reaching more serious buyers. When choosing a website to list your property, consider sites that generate a lot of traffic to increase your visibility and ones that are lower cost.
8. Use Social Media To Your Advantage
If used correctly, social media can be a free way to advertise your property. Post beautiful property pictures along with helpful information about the asset. Keep an eye on your posts to see how many people are viewing them, and reach out to anyone who seems interested. Also, look at similar pages where people advertise their properties and take notes on what attracts your eye.
9. Have a Cash Price in Mind
Having a cash price in your mind can lead to faster sales with buyers who are serious about purchasing. Setting a cash price motivates potential buyers and lets them know you are serious about selling.
Be cautious of offering a cash price to a buyer who intends to finance the purchase. Financing could delay your process by one to two months as the buyer may need to go through an appraisal, loan committee, review, necessary paperwork, etc., to complete the loan.
10. Choose an Experienced Commercial Real Estate Agent
Unless you have potential buyers lined up, you should contact a commercial real estate broker to help sell your property quickly and correctly. A great commercial real estate broker can provide you with a list of active qualified buyers; tell the broker if you want to sell fast.
One way to find an agent is to ask other commercial tenants and businesses around you for recommendations. In addition, it may be helpful to ask firms in similar industries to find a broker who specializes in your market.
The Bottom Line
When selling your commercial property quickly, think like a buyer. Get word of mouth out that you’re selling and provide plenty of information and pictures. Exhaust all of your resources to reach the most people.
In addition to aggressively marketing your property for sale, you want to show that you are organized and responsible so that future buyers can feel at ease. Ensure your property looks clean and have all your paperwork on hand to keep the transaction going smoothly. The better prepared you are, the greater the odds of getting your desired price.
When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.
The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’
Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?
So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.
There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.
However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?
As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.
Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:
Estimating a residential property’s value, even ones in distressed condition or of unique profiles, is pretty simple: you look at the sale prices of similar properties, make some adjustments for condition, style, and location, and there’s your number.
However, it’s not as straightforward with commercial properties. Finding “comps” for commercial properties can be quite a bit more complicated since they come in many more sizes and configurations than a one-, two- or three-bedroom house. This is why commercial investors use cap rates (short for capitalization rates) to gauge the quality of an investment.
But what is a cap rate, how is it used, and how is it calculated? Let’s cover those questions and a few more below.
What Is a Cap Rate?
A cap rate is a number that tells an investor what kind of return they can expect on the investment property and how long it’ll take for them to make back the purchase price. From there, they can also make certain assumptions about the investment’s risk and overall quality.
Cap rates take a property’s net operating income (NOI), the money you’ll make from the property minus any operating expense, and divide it by its purchase price.
So let’s say you’re looking at an apartment building with a price of $10 million. You project that you’ll take in $900,000 in rent with $150,000 of expenses, leaving you with a net operating income (NOI) of $750,000. Dividing that by $10 million gets you a cap rate of 7%.
So what does a cap rate of 7% (or any other percentage) mean?
Interpreting Cap Rate
Low cap rates mean you’ll have lower risk and higher value, though lower cash flow. Higher rates mean you’ll have higher returns, with higher risk and a lower price.
Properties with low cap rates (3-5%) tend to be Class A or B: new construction, good amenities, located in central, desirable locations. Think of a luxury apartment building in Manhattan — high rents, high expenses, but low risk, with very healthy and rapid appreciation.
On the other hand, properties with very high cap rates (more than 8%) tend to be Class C or D properties — older properties that may need repairs, have few or no amenities, and are in less-than-desirable locations with little access to things like good schools or commercial areas. Think of a rural mobile home park: lots of cash rents, few expenses, but high tenant turnover and little potential for meaningful long-term appreciation.
Of course, differences in market and geography can make a big difference. A 6% cap rate for an office building in downtown Nashville, Tennessee, is a lot different than a 6% cap for a warehouse in small-town Wyoming. But these general guidelines are relatively accurate, and a simple, all-inclusive metric is necessary in situations where, for example, you’re trying to convince someone to give you a loan for an investment.
Is a High Cap Rate Better Than a Low Cap Rate?
Asking if a high cap rate is better than a low cap rate is like asking if vanilla ice cream is better than chocolate ice cream — it all depends on your preferences!
If you’re a very long-term real estate investor with a surplus of patience — a “buy and hold” type — you’ll likely want to target properties with low cap rates. While these properties will yield relatively lower cash flows, they’ll see significant increases in value over time, and they’re very safe investments.
Since they’re in high-demand areas, there are few vacancies, so your cash flow is highly predictable, albeit low. Your profits here will be through the equity you build as the property increases in value. And don’t forget — you can improve these properties and raise the rents, which will raise your ROI!
On the other hand, if you’re an investor who wants a “quick win” and prioritizes cash flow, you should target properties with higher cap rates. For example, a Class C apartment building with a cap rate of 10% will consistently bring in a good amount of cash.
However, due to location and tenant profile, the rent and the property value won’t have a lot of room to grow, even if you make significant improvements to the property. A high-cap property is a classic “high floor, low ceiling” situation.
What is Cap Rate Compression?
You can change your property’s cap rate by increasing or decreasing the rent — or market conditions can alter your property’s cap rate.
When property values go up (as they have been for the past several years) but cash flows remain the same, cap rates go down. This is called cap rate compression; a compressed cap rate isn’t necessarily the same as a low cap rate.
Cap rates become compressed when lots of money enters the market, bidding up prices. This creates a strong seller’s market that can price out a lot of investors looking to buy into the market. As prices continue to go up, but NOI stays the same, yields drop.
When yields drop to market interest rates or below, investors must pay cash for their investments. Investors unable to do so are locked out of the market, thus cooling demand. And when demand cools, prices tend to drop — a situation that we’re likely approaching in the residential real estate market as the effect of higher interest rates filters through the market.
In these circumstances, a low cap rate isn’t an indicator of a safe, solid, low-risk investment — it’s an indicator of a potentially overpriced market approaching its peak. The trick, of course, is being able to tell the difference between a low cap rate and a compressed one. It’s not always easy, especially in an uncertain economy. Still, looking at cap rates is one vital tool in a savvy investor’s toolbox.
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If you’re considering adding commercial real estate to your investment portfolio, look no further – this is the article for you. Here, we’ll cover everything you need to know about investing in commercial real estate, from why it’s a smart move to how to get started.
We’ll also provide tips for investing in specific commercial properties, like office buildings and retail space. So whether you’re a first-time investor or a seasoned pro, this article has everything you need to know about commercial real estate investing.
Why You Should Consider Investing in Commercial Real Estate
When people think about real estate investing, they often think of buying a house or a condo. However, other great opportunities exist, particularly in commercial real estate.
If you’re considering investing in real estate, you should look at commercial properties. Here are some reasons why commercial real estate could be an excellent addition to your portfolio.
Generate Rental Income from Commercial Properties
Investors who purchase commercial real estate can generate rental income in a few different ways. One of the most common is leasing space to tenants. Owners can lease on a long-term basis, such as with an office building or retail store, or a short-term basis, such as with a self-storage facility.
Another way to generate income from commercial properties is through parking and concierge services. Investors can significantly increase the revenue generated from their commercial property by charging for parking or offering valet services.
Finally, investors can also structure a commercial lease with a percentage-based rent. This means the tenant will pay a base rent plus a percentage of their sales or revenues. This type of lease can be especially beneficial for properties located in high-traffic areas.
By understanding these different strategies, investors can maximize the income generated from their commercial property portfolio.
Commercial Real Estate Can Appreciate Over Time
Investing in commercial real estate is a viable avenue to build long-term wealth. While the stock market is often volatile, commercial real estate values tend to appreciate steadily over time. Commercial real estate frequently outperforms the stock market regarding return on investment. This appreciation can hedge against inflation since property values usually rise along with the cost of living.
As a commercial landlord, you may be able to shift the costs of inflation to your tenants through CAM charges (common area maintenance fees) or by using a NNN lease (triple net lease) where the tenant is responsible for paying a base rent, plus maintenance, insurance, and property taxes.
These lease types also allow you to increase your rent periodically to keep up with the cost of living. As a result, investing in commercial real estate can be a great way to protect your wealth from inflation.
Tax Breaks When You Invest in Commercial Real Estate
As an investor, you’re likely always looking for ways to minimize your tax bill. When it comes to commercial real estate, there are several tax breaks that you may capitalize on.
One way to reduce your taxes is by deducting your operating expenses. These include property insurance, repairs and maintenance, utilities, and property management fees. By deducting these expenses, you can reduce your taxable net income.
You can also deduct mortgage interest on commercial properties, a significant benefit dramatically reducing your taxable income. In addition, you can also use depreciation to reduce your pre-tax income. Depreciation is a non-cash expense that allows you to recover the cost of your commercial property over time.
Finally, if you sell your commercial property, you can defer paying capital gains tax by doing a 1031 exchange. This allows you to reinvest the proceeds from the sale of your property into another similar property. As long as you adhere to the rules, you can indefinitely delay paying taxes on the sale.
Taking advantage of these tax breaks can save significant money on your commercial real estate investment.
Variety of Financing Options Available for Commercial Real Estate Investors
There are a variety of financing options available for commercial real estate investors. The most common type of financing is through a bank loan. However, there are also several other options, such as private loans, hard money loans, and government-backed loans.
Bank loans are the most common type of financing for commercial real estate. They typically have the lowest interest rates and most extended repayment terms. However, they can be challenging to qualify for if you don’t have a strong credit history or considerable assets.
Private loans are another option for financing your commercial real estate investment. Wealthy individuals or companies typically provide these loans. They often have higher interest rates than bank loans but can be easier to qualify.
Hard money loans are another option, though they are typically a last resort. These loans have very high-interest rates and short repayment terms. They are often used by investors flipping properties or who don’t have the time to wait for a traditional loan to be approved.
Government-backed SBA loans are another possibility, though they are typically only available to certain businesses. These loans often have favorable interest rates and terms.
There are many different financing options available for commercial real estate investors. The best choice for you will depend on your circumstances. Talk to a financial advisor to determine which option is right for you.
Diversify Your Portfolio with Commercial Real Estate
When it comes to investing, one of the smartest things you can do is diversify your portfolio. Including commercial real estate in your investment mix can benefit you in many ways.
First, commercial real estate tends to be less volatile than other investments, providing a more stable source of income. Second, commercial real estate can provide significant tax breaks, which can help to boost your overall returns. Finally, commercial real estate can dynamically protect against inflation, as property values tend to go up when the cost of living rises.
Including commercial real estate in your portfolio can reap these benefits and more. So, if you want to add stability and potential upside to your investment portfolio, consider diversifying with commercial real estate.
How to Get Started Investing in Commercial Real Estate
This beginner’s guide to commercial real estate investing will tell you what you need to know to start investing.
REITs for Hands-Off Commercial Real Estate Investing
Real Estate Investment Trusts, or REITs, are the simplest way to start investing in commercial real estate. You don’t need to buy an expensive commercial building. Instead, you invest the amount you want in a trust, and the trust pools your money with other investors to make commercial real estate investments and generate passive income.
REITs pay no corporate tax on their profits (unlike publicly traded companies) as long as they earn at least 75% of their income from real estate and pay at least 90% of their taxable income to shareholders.
REITs can invest in apartment buildings, offices, hotels, data centers, self-storage facilities, healthcare properties, and more. They might hold rentals or even fix-and-flip houses. The main characteristic of REITs is that the investors don’t actively participate.
The most significant advantages of REITs:
You don’t have to understand real estate or property management. Experts purchase and sell properties, manage rentals, and deal with repairs and maintenance on your and your fellow investors’ behalf.
It’s easier to limit losses. You’ll never have to put up additional money after you make your initial investment. The trust spreads your investment across diverse properties, so any bad luck that can befall any single investment property (toxic mold, local economy, zoning changes, etc.) won’t wipe you out.
REITs are highly liquid. You can sell them immediately at any time for their current total market value. While the rise of CRE tech makes buying and selling faster, it’s still more challenging to try and time the market with an office building.
Most REITs aim to generate stable returns and steady income. They won’t set the world on fire but won’t keep you up at night.
REITs afford you many advantages of rental property ownership without owning the properties yourself. Due to their economies of scale, most REITs pay above-average dividends and generate impressive property appreciation.
Purchasing and Managing Commercial Real Estate
If you want more control and potentially higher (sometimes much higher!) returns, you can invest in commercial real estate yourself. An experienced commercial real estate agent and property manager can alleviate the burden and take care of the tasks you can’t or don’t want to do.
Annual rental income for commercial properties ranges between 6% and 12% of the purchase price. That’s in addition to any property appreciation you realize. According to the Commercial Property Price Index (CPPI), industrial property prices have increased by 18% over the past 12 months. If you earn 12% annual rent and 4-5% yearly appreciation, that’s a healthy 17% annual return.
The quarterly return for unleveraged core real estate held by institutional investors was 3.23%, consisting of 0.97% from income and 2.26% from appreciation. Properties with debt financing have a leveraged total quarterly return of 4.06%. Besides the above-referenced property types, you can choose alternatives such as self-storage, medical, elder care, land, parking, and event space.
Different property types also vary in cost and respond to ongoing market changes, so research into historical market performance is essential. If you have unique expertise in a specific industry, you might have an advantage over less-informed investors.
What Does a Commercial Real Estate Agent Do?
To purchase commercial real estate, you’ll want to rely on the advice and assistance of a commercial real estate agent. The seller’s agent represents the interests of the seller. You’ll want your agent to look after your interests as a buyer. (Both agents split a real estate commission paid by the seller).
A commercial real estate agent’s job is more complicated than a residential real estate agent’s because a commercial real estate investment is a business with many moving parts.
Here are the services a commercial real estate agent may provide for you:
Evaluate property using local comparables or “comps” to determine fair market values
Provide financial information and analysis
Show and explain the features of buildings
Discuss the costs of maintaining facilities and possible renovations
Determine the best method of purchase and review financials
Ensure all paperwork is completed properly
Ensure the purchase is legal and binding
Identify, analyze, and prepare redevelopment plans
Have all properties inspected thoroughly and identify possible repairs
Help negotiate property prices and settlement details
Work with commercial attorneys, loan officers, and agencies to complete the purchase
Help arrange to finance
Unless you are very comfortable with financing and real estate, buying property without an experienced commercial real estate agent’s assistance is probably a big mistake. If you don’t understand these formulas, don’t even think about going it alone:
Net Operating Income (NOI): Revenue minus costs, excluding debt service and depreciation. Operating costs typically include insurance, property management fees, utilities, repairs and maintenance, and property tax.
Cap Rate: Short for “capitalization rate,” this percentage equals net operating income divided by purchase price.
Cash on Cash: Cash on cash tells you how quickly you’ll recoup your initial out-of-pocket investment. To calculate cash on cash return, divide the cash income earned after paying all operating expenses (including any debt service) by the total money invested.
Your agent should help you calculate these figures and determine which properties make the best investments.
How Much Work Is Commercial Property Investing?
Here are some important points when deciding if you want to handle your properties entirely or outsource some or all of the work:
Business owners renting commercial space have a vested interest in maintaining their premises because their business will suffer if they don’t. This is like having them on your management team, taking on a chunk of the workload.
Most businesses close at night and have an alarm monitoring service so that if anything does happen at night, the alarm company notifies the authorities. Less work for you.
Commercial property can be easier to value because you can see the seller’s income statement. A knowledgeable broker should establish a price that delivers your area’s prevailing return (known as the “cap rate”).
Commercial properties often come with “triple net” leases, where the tenant is responsible for all property maintenance and expenses, including real estate taxes.
If you have many properties or buy apartment buildings, you’ll have to invest time and money (or hire a property manager). You may have to administer multiple leases, calculate annual CAM (Common Area Maintenance) adjustment costs that tenants are responsible for, and account for maintenance and repair, liability, and public safety.
It’s risky to DIY your property management unless you’re licensed to do the tasks you take on because of the liability potential. Include applicable property management/maintenance costs when determining what you’ll pay for a commercial investment property. Property management typically costs 5% to 10% of rent revenues. It’s also wise to outsource the maintenance and repair.
Commercial properties usually have more public visitors, have more public visitors, creating additional damage, injury, and theft opportunities. Look into insurance coverage and cost when evaluating a commercial property.
If you lack commercial property management experience, you may wish to initially hire a property manager, even if you eventually want to manage your buildings.
What Does a Property Manager Do?
If the list above appears daunting, relax. You can bring in professional help. Here are the services (when applicable) your commercial property management fees can buy:
Establish and maintain a maintenance schedule
Establish and implement housekeeping programs
Supervise all vendors
Supervise repairs and alterations
Analyze service contracts to determine which providers are the most cost-effective
Collect all rents, additional charges, and miscellaneous income
Review existing leases and prepare new leases
Provide monthly financial reports
Pay real estate and personal property tax, improvement assessments, and other charges.
Prepare tenant analysis for retail spaces.
Make all mortgage, ground lease, and promissory note payments and comply with mortgage documents.
Enforce leases per their terms and notify you of any defaults
Distribute income to you at your request
The service you require from a property manager depends on the number of tenants and leases and your operation. If you own a single building with one industrial tenant and a triple-net lease, that’s much less work than an apartment complex with 100 residential tenants and leases.
Financing Commercial Real Estate
There are many ways to finance commercial real estate, depending on the type of building and what you’re doing with it. Your agent should be able to point you in the right direction for appropriate loans.
Small Business Administration (SBA) 7(a) and 504 Loans
SBA 7(a) loans and SBA 504 loans are business loans backed by the Small Business Administration (SBA). SBA 7(a) loans are the most common type of SBA loan used to purchase commercial properties up to $5 million. These loans typically request at least 10% down, a minimum credit score of 680, and at least three years in business. Interest rates range from 5% to 8.75%.
The property must be at least 51% owner-occupied, which means you can use it for your business and rent to other tenants as long as your space accounts for more than half of the total square footage.
SBA 504 Loans are similar to the 7(a) loan, except the 504 does not have a maximum loan amount.
Conventional Commercial Mortgage
Lenders typically require a 25% down payment minimum in exchange for a fixed-rate mortgage ranging from 5 to 30 years (most commonly between 5 and 10 years). Excellent credit is required, but the interest rates are among the lowest for commercial real estate financing.
These loans are appropriate for properties in good condition with established income.
Commercial Bridge Loan
A commercial bridge loan is a 6-to-12-month loan you might use if you need to improve or lease your property before you can refinance it into a long-term loan with better terms.
Because they have short terms, bridge loans come with higher interest rates and fees. Expect to pay an interest rate that’s .5% to 2% higher than a traditional, fixed-rate mortgage.
Hard Money Loan
Hard money loans are an alternative form of capital provided outside traditional lending channels by individuals or companies. If you need to move quickly to purchase a property, you might use one, but they have concise terms and high fees.
Hard money lenders care primarily about the property value and less about your creditworthiness. Hard money loans are also private mortgages and don’t have the same consumer protections as other products. Expect to pay interest rates ranging between 10% and 20%.
How Much Involvement? It’s Your Choice
Real estate investment can be as involved and complicated as you want to make it. There’s a whole spectrum of involvement, risk, and potential return, from entirely passive REITs to 100% owner-selected and -managed buildings and everything in between.
A knowledgeable broker and proficient property manager are probably worth every penny and a great way to learn without being burned if you’re just getting started.
Here’s a detailed breakdown of how REIT stocks work, the pros and cons of REITs, and some of the best REIT stocks to invest in this year.
What are REIT stocks?
A real estate investment trust (REIT) is an income property organization that acquires and manages income-producing commercial real estate.
REITs invest in commercial real estate asset classes like retail real estate, office buildings, apartments, and multifamily property, leisure and hospitality assets, industrial properties, and special-purpose real estates investments such as self-storage or data centers.
The largest publicly traded REITs have proven performance track records and provide investors with regular dividend payments. Those are merely two reasons why real estate investment advisors recommend REITs as promising passive real estate investments.
Invest at least 75% of total assets in real estate assets and cash.
Derive at least 75% of gross income from real estate-related sources, such as rents and mortgage interest.
90% or more of taxable income must be distributed to shareholders annually, usually as dividends.
Have fully transferable shares.
Have a minimum of 100 shareholders after the first year as a REIT.
Have no more than 50% of shares held by five or fewer individuals during the last half of the taxable year.
Common Types of REITs
REITs generally fall into one of three main categories, along with some often-overlooked special-purpose asset classes:
Common REIT types
Equity REITs own the underlying real estate and act as a landlord, collecting rents and managing and maintaining the property.
Mortgage REITs own the debt securities secured by the property; while they may be riskier than equity REITs, they usually pay higher dividends to investors.
Hybrid REITs combine equity and mortgage REITs and can provide investors with better risk-adjusted returns.
Special purpose REITs
Industrial REITs include warehouses, cold storage, and distribution centers.
Data center REITs include buildings that house switches, storage systems, and routers.
Self-storage REITs own and operate self-storage facilities.
Lodging and hospitality REITs own, acquire, and manage hotels, luxury resorts, and business-class hotels.
Timberland REITs invest in forest land assets and generate income by harvesting timber and related products.
Infrastructure REITs property types include energy pipelines, telecommunications towers, fiber cables, and wireless infrastructure.
Pros and Cons of REIT Stocks
As with any commercial real estate investment, there are benefits and drawbacks to REIT stocks that investors should be aware of.
Benefits of REIT stocks
Recurring dividends with 90% of taxable income distributed to shareholders.
REITs pay no corporate taxes, maximizing dividend payments to investors.
Access to high-quality commercial real estate, including shopping centers, iconic office buildings, and single-family home developments.
Very liquid because REITs trade on the major stock exchanges and can easily be bought and sold online.
Portfolio diversification geographically and by asset classes protects capital through economic ups and downs.
Higher potential returns due to regular dividend distributions and appreciation of asset values over the long term.
Drawbacks of REIT stocks
Dividends distributed to shareholders are taxed as ordinary income unless REIT stocks are held in an IRA.
Interest rate changes can affect the level of debt service in a REIT, as with other real estate investments.
REITs may have lower growth and capital appreciation because most profits are paid out to investors as dividends.
Some asset classes held by REITs may have higher potential property-specific risk than others.
REITs are ideal as long-term buy-and-hold investments that may not suit the needs of every real estate investor.
Things to Look For in a REIT
Before buying a REIT stock, there are several things an investor should keep in mind:
Best REITs provide consistent high dividends along with long-term capital appreciation.
REITs are highly liquid, with stocks trading on all major exchanges instead of directly owning illiquid real estate.
Looking at a REIT’s funds from operations is a better way to assess the true value of the REIT because depreciation expense can understate the actual value of the assets held.
Search for REITs with a historical track record of success through all stages of the economic cycle.
Look for REITs that own quality property leased to stable regional or national tenants.
REIT stocks offer something for every type of real estate investor, from high-quality commercial real estate assets to niche special-purpose properties. Investing in REIT stocks is prudent, as it provides solid long-term performance, healthy and stable dividend yields, and portfolio diversification to its shareholders.
Tips for Investing in Multifamily Properties
Apartment buildings offer great benefits for commercial real estate investors due to their scale and potential for high returns. Demand for rentals is currently high because of a low-cost housing shortage in most American cities.
Owning a property with multiple units can be incredibly lucrative with the right financing. A report released in July 2022 revealed that the national median rent for a one-bedroom apartment is $1,450 and $1,750 for a two-bedroom. Multiplied by, say, 100 units, an investor could be making upwards of $1.7 million in gross rental income per year.
Multifamily properties, however, can carry a hefty price tag and aren’t necessarily the most straightforward purchase. That being said, not all apartments are ultra-expensive, and some buyers can find multifamily properties for little to no money down.
Below, we offer tips on purchasing and managing an apartment building with cash flow and cover creative ways to invest passively in multifamily housing without owning property.
Finding a Multifamily Property
Before investors can start making money, they must find a property that matches their budget, goals, and needs.
Set your budget
Step one to buying an apartment building is setting your budget. In addition to setting aside money for a down payment, calculate how much you’re willing to spend on repairs, maintenance, and other associated costs, such as building security.
Use a realtor
Use a local realtor who specializes in helping investors find commercial real estate. These agents will have access to properties that have not yet hit the market because of their connections. They will be able to find properties that match your goals and budget.
Choose a market
Choosing the right market is hugely important in finding a property that will generate significant cash flow. Check if rental prices in the neighborhood you want to buy in have been increasing or decreasing in recent years. Determine if the property is in an area with job opportunities for tenants or near where you currently live (it’s easier to manage a property you can drive to rather than one out of state).
Pick the right financing.
Another vital step to buying a multifamily property is choosing the right type of financing. Some options include:
Commercial loans: Banks will offer lenders a traditional mortgage for properties with four units or fewer. However, you will need a commercial loan for an apartment complex. These types of loans have different requirements than residential home loans and often require larger down payments.
Find a partner (or several): Some investors may decide to pool their money together to purchase a multifamily property. By finding a partner or partners, an investor can buy a larger property, increasing their potential ROI and decreasing their risk.
Find a hard money lender: If an investor does not qualify for a commercial loan (due to previous credit history or the property’s condition), they may consider finding a hard money lender to give them cash. Hard money loans have higher interest rates and shorter time frames than traditional loans.
1031 exchange: 1031 exchanges are named after section 1031 of the internal revenue code. The rule is triggered when a property’s sales price exceeds its purchase price, producing a profit or a “capital gain.” Capital gains are subject to taxes, but under a 1031 exchange, investors can defer these taxes. 1031 exchanges have strict rules and only work if an investor swaps one property for another of equal or greater value. While this is not financing per se, it can help during the purchasing process and helps increase overall ROI.
Hire a real estate attorney
Commercial real estate transactions are much more complicated than residential transactions. Hiring a real estate attorney is always best when dealing with a complex transaction.
Although lawyers often range between $150 to $350 per hour, they will help develop contracts and agreements and carry added weight during negotiations. If the investment is a joint purchase, a lawyer can ensure the co-buyer agreement clarifies precisely how each party will hold the title. To protect both parties, many commonly encountered gray areas must be clarified in writing.
Owning a Multifamily Property
After buying the perfect investment property, the investment journey truly begins.
Maintenance & Upkeep
Owning an apartment complex is a huge responsibility; maintenance will take a large piece out of the bottom line. It’s best to research the local region’s average common renovations and repairs rate before buying. Renovations can include:
Repainting the exterior and interiors
Redoing the landscaping.
Fixing the flooring
Changing light fixtures
Updating appliances
There will also be additional associated costs such as insurance, security, cleaning, property taxes, etc.
Attract quality tenants
Owners need to make sure their property has a wow factor. In addition to choosing the right location and maintaining the property’s appearance, there are several things investors can do to attract quality tenants. These include:
Creating a well-written listing with high-quality photographs
Installing amenities found in nearby popular communities
Using digital tools for applications and leases
Interviewing tenants and performing a background check before lease-signing
Laying out clear rules and criteria for tenants before they move in
A real estate attorney or agent can help owners create and implement some of the abovementioned items. They also can offer references for contractors, insurance agencies, staffing offices, cleaning services, and more.
Keep residents happy
Owners and building managers need to listen to their tenants. Making necessary repairs promptly, using online tools for rent payments and amenity requests, and responding quickly to concerns are a few ways to keep residents happy. In the long run, ensuring the happiness of a property’s tenants will determine the popularity of a property and the quality of tenants it attracts.
Options for Passive Investors
For some investors, owning an apartment complex is perhaps out of budget or carries too much responsibility. However, they may still want to invest passively in commercial real estate.
REITs
One of the most popular ways to passively invest in commercial real estate is through a real estate investment trust (REIT). See above for a full guide on REITs.
Crowdfunding platforms
Like REITs, crowdfunding platforms offer individuals the chance to invest in property without physically buying and managing it directly. Unlike REITs, crowdfunding platforms are not publicly traded on an exchange. Investors can choose the property they want to invest in and are paid through the profits a property earns (e.g., via rental income, flipping the property, etc.).
Whether an investor decides to own and manage an apartment complex or passively invests via REITs and crowdfunding apps, they should not be afraid to dive into commercial real estate. With proper research and dedication to an investment, multifamily property owners have the potential to earn high ROI and quickly diversify their portfolios.
What to Know About Investing in Office Buildings
A recovering economy and more workers returning to the office generate renewed interest in office buildings for sale. Many investors looking for offices for sale are surprised to learn that office rent growth has been steadily increasing year-over-year despite the pandemic, while office-using employment is on the rise.
Why Investors Like Office Buildings
Buy-and-hold investors seeking stable cash flow, inflation protection, and depreciation benefits to reduce taxable net income often invest in office buildings.
Stable cash flows
Office building lease terms typically run for 5-10 years, providing office building investors with bond-like returns without the cost and inconvenience of annual tenant turnover. Relocating a business from one office location to another can be prohibitive. An office building tenant often has a built-in incentive to renew the lease instead of looking for new office space for rent, making an office for sale an attractive investment.
Multiple lease structures
An office building for rent may offer gross, modified gross, or triple net (NNN) lease structures, each with distinct advantages, depending on an investor’s objectives. Office building leases can be written to protect the landlord from inflation by passing part or all of an office building’s operating expenses through to the tenant, in addition to annual base rent increases.
Tax benefits
Assets like office buildings depreciate over 39 years, creating a tax shelter for real estate investors. For example, if the value of an office building (excluding the land) is $1 million, an investor can write off $25,641 in depreciation expense to reduce taxable net income. That’s why an office building for sale can provide a potential depreciation tax shelter.
Office Building Investing Basics
Office buildings come in all shapes and sizes and exist in nearly every commercial real estate market in the US. According to Cushman & Wakefield, there are over 5.5 billion square feet of office space in the country, with more than 93 million square feet currently under construction.
Because the office building asset type is rather broad, investors often categorize office buildings by class, size, and tenant type or use:
Office buildings classes
Class A: New or like-new “trophy properties” with the latest features and amenities, usually located in the central business district (CBD) of large urban areas, occupied by the best tenants.
Class B: Slightly older office buildings well maintained and in good condition, often occupied by local or regional tenants. May offer the opportunity for value add improvements to generate additional rental income.
Class C: Older office buildings requiring significant remodeling and updating, sometimes located in business areas that have lost their luster. Class C office buildings may be good candidates for repositioning into mixed-use projects or conversion into the multifamily property.
Size of office buildings
Office buildings can range from one to over 100 stories in height. There are single-level or storefront office buildings, low-rise office properties of two to three floors, and mid-rise with up to 24 floors. High-rise office skyscrapers tower above, such as the 1,776-foot tall World Trade Center in New York City or the Willis Tower (formerly the Sears Tower) in Chicago with 1,450 feet of high-rise office space.
Office building types
Office building types are often characterized by the types of office tenants leasing the space. According to the Appraisal Institute, office buildings types include:
Business park
Condominium building with multiple office units
Creative or office loft
Medical office buildings
General-purpose office properties
Research and development
Other office spaces such as mixed-use developments with office, retail, and residential space
Three Types of Office Building Leases
Office building leases generally come in three varieties:
Gross leases benefit the tenant by including everything (such as utilities, janitorial, and maintenance) in the monthly rent and may be used by office landlords as short-term leasing solutions until a long-term tenant moves in.
Modified gross leases are lease variations that pass through some operating expenses to the tenant, such as annual increases for common area maintenance, property or real estate tax, or insurance.
Triple net leases (NNN) include a monthly base rent plus a pro-rata charge (based on the percentage of space a tenant occupies) for the three nets of maintenance, property tax, and insurance.
Office Building Investing Terms to Know
When analyzing a potential office building, there are several terms that buyers should know and understand to help make the right investment decision:
Gross rent is the annual rent that landlords can collect if tenants fully lease the office building 100% of the time.
Effective rent factors in potential rental income lost to vacancy when space is empty between tenants, additional rental income from amenities such as parking, and bad debt expense when a tenant does not pay the rent.
Operating expense is the landlord’s ownership costs for common area maintenance (CAM), such as repairs, janitorial, landscaping, parking lot, utilities, property taxes, and insurance.
Net operating income (NOI) subtracts operating expenses (excluding mortgage or debt service) from the effective rental income.
Cap rate is a ratio that calculates the annual investment return of an office building by dividing the NOI by the office building value or sales price.
Gross building area is the square footage of the office building and includes rentable office space plus common areas such as a lobby, mailroom, public restrooms, and elevator shafts.
Gross leasing area (GLA) is the percentage of an office building’s rentable gross space. For example, an office building may have 100,000 square feet of gross space but only 75,000 of rentable space, limiting how much rental income the building may generate.
Price per square foot is the value or sale price of the office building divided by the size of the office building. Office building investors calculate the price per square foot of an office building based on the GLA or rentable square feet rather than the gross building area.
Tenant improvements (TIs) are alterations made to customize an office suite for the needs of a specific tenant. The landlord and tenant may negotiate an office lease to include a certain amount of TIs as part of the monthly office rent, with any ‘extras’ such as upgraded flooring paid for by the tenant.
Potential Drawbacks to Investing in Office Buildings
Office lease rates and the demand for office space generally go up or down based on the strength of the local and national economy. During a recession, the need for office space can decline, and the rent tenants can afford to pay may decrease.
Office buildings with many leases expiring soon may create unexpected vacancies for an investor if tenants choose not to renew their leases. Finally, older office buildings may be difficult to lease if obsolete floor plans. That’s one reason old office buildings can be a better choice for investors seeking value add and repositioning opportunities.
The Bottom Line on Investing in Office
As the economy recovers, there are signs that the office market is also improving. CBRE analyzed the prospects of the largest US office markets based on key metrics, including positive net absorption, leasing activity, construction completions, increase in average gross asking rent, and growth of office-using jobs.
Based on the survey results, some major office markets to consider are Los Angeles, Boston, Atlanta, Seattle, Manhattan, and Dallas/Fort Worth.
Tips for Investing in Retail Properties
If you’re like most commercial real estate investors, you’re always on the lookout for new opportunities. And if you’re looking to invest in retail properties, you’re in luck. This type of investment is experiencing healthy growth in many markets right now.
However, while retail can be an attractive investment opportunity, it’s essential to understand the ins and outs of the retail market before making any decisions. Here are some tips for investing in retail properties.
Types of Retail Properties Available for Investment
When it comes to investing in retail property, a few different options are available. Each has its pros and cons, so it’s important to carefully consider your goals and needs before making a decision.
One option is to invest in a shopping center. These tend to be large properties with multiple tenants, which can provide a steadier income stream than a single retail storefront. However, they also require more management and upkeep, and you may have less control over the individual businesses that lease space in the shopping center.
Another option is to invest in a strip mall. These are similar to shopping centers but smaller and with fewer tenants. They can be easier to manage than larger properties but may also be less profitable.
Finally, you could choose to invest in a single retail storefront. This gives you the most control over your property, but it also means that your income will depend more on the business's success that leases the space.
Benefits of Investing in Retail Properties
You may wonder if investing in retail properties is a smart move for a commercial real estate investor. After all, the retail sector has been struggling in recent years, with many big-name brands shuttering stores and investing more heavily in online sales.
However, there are plenty of reasons to consider investing in retail properties. For one thing, retail properties tend to be located in high-traffic areas, which can translate into higher rent rates. Additionally, retail tenants typically have longer lease terms than other tenants, providing more stability for landlords. And while online shopping may be on the rise, experts predict that brick-and-mortar stores will remain a vital part of the retail landscape for years to come.
Here are five benefits of investing in retail properties:
Retail properties are typically located in high-traffic areas.
Retail tenants typically have longer lease terms.
Brick-and-mortar stores are predicted to remain a vital part of the retail landscape.
Investing in retail properties can help diversify a portfolio.
There are opportunities to add value to a retail property through renovations and re-tenanting.
Risks of Investing in Retail
If you’re thinking about investing in retail properties, there are a few risks to keep in mind. First of all, retail businesses can be susceptible to economic downturns. If there’s a recession, tenants may have difficulty paying their rent, and you may end up with vacant units. Additionally, retail properties are often subject to high turnover rates. You may have to deal with the costs of re-leasing units regularly.
To minimize these risks, do your homework before investing in retail property. Make sure you understand the local market and the demographics of the area where the property is located. Additionally, it’s important to choose tenants carefully and screen them thoroughly before signing a lease agreement. By taking these precautions, you can minimize the risks of investing in retail property and maximize your chances of success.
How to Choose the Right Retail Property for Investment
There are several best practices an investor should follow when choosing the best retail property to invest in:
Consider the location
Research the demographics of the area
Look at the competition
Analyze the foot traffic
Understand your target market
Have a solid business plan
The location of retail property is crucial for several reasons. The first is that it can impact the demographics of the area. If the location is in a high-traffic area, there will likely be a higher concentration of potential customers. This can lead to increased foot traffic and more business for the retailer.
Demographics are the characteristics of a population, such as age, gender, income, etc. An investor needs to consider demographics when choosing a retail property to purchase because it can give them insights into the type of customers that will be shopping at the property and their needs and preferences. This information can help the investor decide the type of property to purchase and how to market it to potential tenants best.
Additionally, consider nearby competition as well. If there are other retailers in close proximity, it is essential to understand their business model and target market. This knowledge can help an investor determine if there is a niche that can be exploited.
When considering a retail property investment, it is important to look at foot traffic. This information can be gathered through research or by talking to local businesses. It can give insight into the potential customer base for the property. Understanding the target market is crucial. This information can help an investor determine what type of retail business would be most successful in the space.
Finally, having a solid business plan is essential. This document should outline the goals of the business, the target market, and the financial projections. Without a well-thought-out plan, it won't be easy to make a retail property investment successful.
These six factors are important considerations when choosing a retail property for investment purposes. By taking the time to research each one, an investor can make a better decision that will lead to profitability.
The Bottom Line on Investing in Retail
Investing in retail property can be a wise decision for investors who do their homework and choose their properties carefully. Retail properties offer the potential for high returns, which can be an excellent way to diversify one’s portfolio. However, it is important to understand the risks involved before investing. By following the tips outlined above, investors can greatly increase their chances of success when investing in retail property.
What to Know About Investing in Industrial
For savvy commercial real estate investors, industrial property is one of the smartest choices. Depending on your location and the current market conditions, industrial can offer significant returns with relatively low risk.
Investors would be wise to keep an eye on this asset class as the industrial market continues to heat up. Industrial properties offer a unique combination of strong rental growth potential and low volatility, making them an attractive investment for those looking to ride the wave of this booming market.
So if you’re looking for a smart way to grow your portfolio, read on for what you need to know about investing in industrial property.
Different Types of Industrial Property
The industrial property market has been on fire over the past several years, with strong demand and rental growth across all three major sub-types: warehouse/distribution, manufacturing, and office service/flex.
The main drivers of this robust demand are the continued growth of e-commerce, the ensuing need for last-mile distribution centers, and the ongoing shift of manufacturing operations back to the U.S. from China and other overseas markets.
Let’s take a closer look at these three types of industrial property and discuss why they’ve been in such high demand lately.
Warehouse/Distribution Centers
The growth of e-commerce has been a major tailwind for the warehouse/distribution sub-type. As more and more consumers shop online, retailers need ever-larger warehouses and distribution centers to store and ship their products.
Moreover, the rise of e-commerce has spurred the development of new “last-mile” distribution centers, which are smaller facilities located closer to urban areas where most consumers live. These last-mile distribution centers help ensure that online orders can be delivered quickly and efficiently.
Manufacturing Facilities
The other primary driver of industrial demand has been the shift of manufacturing operations back to the U.S. from China and other overseas markets. This so-called “reshoring” trend has been driven by several factors, including rising wages in China, the increasing cost of shipping goods from overseas, and concerns about the reliability of overseas supply chains.
As manufacturing operations have moved back to the U.S., they’ve needed new or expanded facilities to house their operations. This has been a major boon for the industrial market, especially for manufacturers located near population centers with high demand for their products.
Office Service/Flex Facilities
The third major type of industrial property is office service/flex space, typically used by businesses that need a mix of office and warehouse space, such as start-ups or tech companies. The growing popularity of coworking spaces has also helped drive demand for office service/flex space in some markets.
These facilities have become increasingly popular as businesses look for ways to reduce overhead costs. And with the rise of e-commerce and the resulting need for last-mile distribution centers, office service/flex space near urban areas has become especially coveted.
Benefits of Investing in Industrial Commercial Real Estate
Investing in industrial, commercial real estate comes with several benefits, including:
Strong rental growth potential: The continued growth of e-commerce and the ensuing need for last-mile distribution centers is expected to drive solid rental growth for industrial properties.
Low volatility: Industrial properties tend to be less volatile than other asset classes, such as office or retail, making them a relatively safe investment.
Diversification: Adding an industrial property to your portfolio can help diversify your holdings and reduce your overall risk.
Attractive yields: Industrial properties typically offer higher yields than other types of commercial real estate, making them an attractive investment for income-seeking investors.
Limited supply: The industrial market is currently undersupplied in many markets, which could lead to even more substantial rental growth and higher yields in the future.
Industrial, commercial real estate is worth considering if you’re looking for a safe and profitable investment. And, with the strong tailwinds of e-commerce and the reshoring trend, now is a great time to invest.
Risks Associated with Industrial Properties
Like any investment, industrial properties come with certain risks. Here are some of the biggest potential risks associated with investing in industrial properties:
Growth of e-commerce could slow down: While the growth of e-commerce has been a major tailwind for the industrial market, there’s always the risk that this trend could reverse course.
Reshoring trend could reverse: The return of manufacturing operations to the U.S. from China and other overseas markets has been a major demand driver for industrial space in recent years. However, this trend could reverse if the U.S. becomes less attractive as a manufacturing destination or if other countries offer more competitive costs.
Interest rates could keep rising: Rising interest rates could pressure industrial property owners, as higher borrowing costs make it more expensive to finance their properties. This could lead to lower investment activity and slower rental growth in the market.
Development of autonomous vehicles could disrupt logistics: If self-driving trucks become a reality, it could lead to a decrease in demand for warehouses and distribution centers, as goods can be shipped directly from manufacturers to consumers without the need for intermediate storage.
What to Look for When Evaluating an Industrial Investment Property
Investing in industrial, and commercial real estate can be a great way to boost your portfolio’s performance. Still, it’s important to know what to look for before deciding. There are several factors to consider when looking for an industrial property to invest in:
Location
The location of an industrial property is one of the most important factors to consider when evaluating an investment. Look for properties near major transportation hubs, such as highways, airports, and railroads. These locations will attract tenants who need to ship goods quickly and efficiently.
Size
The size of industrial property is also an important consideration. Make sure to choose a size appropriate for the type of tenants you’re targeting. For example, if you’re looking to attract distribution companies, you’ll need a larger facility than if you’re targeting light manufacturing businesses.
Condition
The condition of industrial property can have a significant impact on its profitability. Be sure to inspect the property carefully and make sure that it is in good repair before making an offer. Otherwise, you may need to spend money on repairs or renovations before leasing it out, which can eat your profits.
Amenities
When evaluating an industrial property, check for amenities that make it more attractive to tenants. For example, properties with on-site parking, loading docks, and security systems will appeal more to potential tenants than those without these features.
Zoning
Another important factor to consider when evaluating an industrial property is its zoning. Make sure the property is zoned for the type of business you’re looking to attract. Otherwise, you may have difficulty getting the proper permits to operate your business.
Taxes
The tax burden of industrial property can also have a big impact on its profitability. Be sure to research the local property tax rates before making an offer on a property. Otherwise, you could face a large bill that eats into your profits.
By taking the time to evaluate all of these factors, you can make sure that you’re choosing an industrial property that will be profitable and suitable for your needs.
The Bottom Line of Investing in Industrial
Industrial properties can be a great investment for diversifying their portfolio or income stream. There are a few things to keep in mind when considering an industrial property investment, such as the location of the property, the size and type of the property, and the potential uses for the property. Industrial properties can offer several advantages, such as high rental incomes, low vacancy rates, and long-term lease agreements. With careful planning and research, industrial property can be a wise and profitable investment.
What to Know About Investing in Self Storage
Although the percentage of self-storage investments may be low compared to the entire commercial real estate sector, the self-storage industry is rapidly maturing into a core asset class on par with office, retail, multifamily, and industrial.
There are currently more than 1.9 billion square feet of self-storage space in the U.S., and 13.5 million households use self-storage space, according to SpareFoot Storage Beat’s most recent study.
While self-storage properties may fly under the radar screen of many, there are more self-storage facilities in the U.S. than all of the Subway, KFC, Pizza Hut, and Taco Bell locations combined.
Characteristics of the self-storage asset class
Self-storage properties are often viewed as the ideal asset class for conservative investors seeking more predictable returns than value-add or opportunistic investments, especially because both general consumers and businesses rent self-storage space.
As with most commercial real estate projects, the new construction of self-storage facilities slowed during the pandemic. However, the new supply of self-storage space in the pipeline remains steady, driven by robust investor demand and economic recovery.
Developers delivered 45 million square feet of self-storage space last year, and another 50 million square feet will come onto the market in 2022. The national average monthly rent for self-storage space is $1.40 per square foot, with the average self-storage unit renting for $149 per month.
Self-Storage Industry Trends in 2022
While self-storage has long been used for consumer storage, businesses also drive demand.
According to a recent ReporterLinker study, clothing manufacturers producing seasonal items opt for temporary self-storage space as a more cost-effective alternative to traditional year-round warehouse space.
E-commerce players are increasingly using self-storage space to store products for last-mile delivery, helping to mitigate inventory management problems and strengthen supply chain operations.
Self-Storage Performance Statistics
According to research and analysis by StorageCafe, the self-storage industry continues to out-perform many other commercial real estate asset classes:
The national average rent for a 10’ x 10’ self-storage unit is $132 per month.
Street rates for 10’ x 10’ non-climate-controlled self-storage units have increased by 3.5% year-over-year (June 2022 vs. June 2021).
National rates for 10’ x 10’ climate-controlled self-storage rose by 3.2% year-over-year.
All top markets have seen street rental rates increase year-over-year, and 11 saw 10% or higher rent growth.
The new-supply pipeline of self-storage space has remained steady, with 44.8 million SF delivered in 2021 and 50 million SF expected to be delivered in 2022
Self-storage sales volume increased to $10.9 billion in 2021, more than two and a half times the previous year.
Deal activity in the self-storage sector was about 250% higher than in 2020, with investors like StorageMart and Life Storage purchasing 158 properties for nearly $4 billion.
Around 108 million SF of self-storage space changed hands in 2021, double the 54 million SF in 2020.
Growth in the self-storage sector is expected to remain positive, with demand driven by the pandemic recovery and steady demand for self-storage space.
Things to Know Before Investing in Self Storage
Gen Xers are the largest cohort of users of self-storage space, with 54% keeping items in storage. The top reason for renting self-storage units is downsizing, relocation, not having enough space at home, and a change in household size.
Overall, when looking at self-storage rental patterns, 31% of users rent for between 2-6 months, while 40% rent for over one year. Over 60% of self-storage users rent unit sizes of 10’ x 10’ or larger, while about the same percentage of men and women rent self-storage space.
Here are some of the pros and cons of investing in the self-storage asset class:
Pros
Minimal construction costs with self-storage units easy to build and maintain.
Economically resilient with self-storage seeing demand through all economic cycles.
A flexible business model with short-term leases allows owners to adjust rental rates to market demand.
Value-add revenue streams include packing supplies, moving equipment, and tenant insurance.
Cons
Self-storage unit mix and amenities – such as interior vs. drive-up space, climate-controlled, and 24/7 access – must be carefully analyzed to meet the local market’s needs.
Hiring and retaining on-site management for larger self-storage facilities can be challenging.
Changing tenant demographics may affect the future demand for self-storage space.
Month-to-month leases can mean a larger percentage of tenant turnover.
The Bottom Line
If you’re considering investing in commercial real estate, there’s much to consider. From the type of property you’re interested into, the financing and budgeting involved, there’s a lot to learn. But don’t let that intimidate you – with the right information, investing in commercial real estate can be a great way to build wealth.
This article covered some basics of commercial real estate investing, including why it can be a smart investment, how to get started, and what to keep in mind when considering different properties. Remember that no two investments are exactly alike, so do your homework and talk to experts before making any decisions. With careful planning and execution, commercial real estate investing can be a great way to achieve your financial goals.
