Commercial real estate can be a lucrative investment with meticulous planning and a well-executed strategy.
Investors are pulled to real estate for a number of reasons, including income generation, capital preservation, and inflation hedging, among other things. Because commercial real estate assets also have a low correlation with other types of investments, like bonds and stocks, it’s a good option especially during times of economic uncertainty and turmoil.
Investors must be diligent about how they approach decisions regarding their real estate portfolios. If you’re new to the world of real estate investing and don’t yet fully understand its nuances, it’s critical that you consider the following: What property types are you interested in? What geographies will be your main focus? What is your risk tolerance? How much control would you like to have over your investments?
With these questions in mind, here is a breakdown of the four basic guidelines investors should keep in mind to successfully invest in commercial real estate.
1. Select Property Types Carefully
The top commercial estate property types include office, multifamily, retail, and industrial. Each property has its own nuances, but economic trends also impact these property types differently.
Multifamily is typically the more highly favored option, however, regulatory reform like rent caps and rent control can affect returns. Office buildings are another popular choice, although the COVID-19 pandemic has changed the trajectory of these investments for the long-term, with more businesses opting for hybrid and remote work environments. If you’re interested in entering into long-term leases that can last up to 10 or more years, retail spaces, like grocery stores, automotive services, and urgent cares, could be the best fit for you. Lastly, industrial properties are being revered for their robust returns, which have only been accelerated by the pandemic.
2. Understand How Location Can Impact Investment Potential
Typically, commercial real estate investments will perform better in high-demand geographies that have strong population numbers and job growth. Natural disasters and certain political outcomes can also impact investment potential as well. Investors would do well to spread their investments across different regions to reduce risk.
3. Identify Your Risk Tolerance
This is a guideline that investors should consider no matter what’s in their portfolio. There are four different investment strategies that vary in risk. On the lower end are core assets, which refers to commercial real estate that’s more stabilized. Low-to-moderate are core-plus assets, where real estate is stabilized, but there are potential risks like building age or lease rollovers. Moderate-to-high are value-add assets, which refer to properties with some deficiencies that must be approved upon to acquire larger gains. On the higher end are opportunistic assets, which have major risks, like high vacancy rates or structural issues.
4. Determine How Much Control You Want
This guideline is pretty straight forward. Do you want complete control over your investments, or less control? Wholly owned investments and joint venture investments give investors the most control over, while private real estate funds and publicly-traded REITs give investors the least control.
With these guidelines in place, you are ready to start building and implementing your commercial real estate investment strategy.