Commercial real estate (CRE) is considered an investment class that is a valuable alternative to more traditional investment classes such as stocks, bonds, and money market accounts. This is not to say that CRE should replace these investment classes in a portfolio. Still, it is an effective way to diversify the portfolio and add an investment that has the option to be a solid choice for continual income and the ability to grow over time. As with any type of investment, all CRE choices are not created equal. There are bad CRE investments that can, to a new investor, look like an excellent deal. Working with an experienced commercial real estate agent is essential in navigating the various opportunities on the market and choosing one that is right for your risk and investment level.
Considering the Options
There are many different types of property that fall under the heading of commercial real estate. The five main categories or sectors are traditionally considered to be multifamily, retail, office, industrial, and a catchall category of special interest. The performance in each of the five sectors will vary based on location and current economic trends. Over the last few years, industrial and multifamily investments have increased, while retail spaces tend to have decreased in value. At the same time, different properties have more risks for the investor. For example, an industrial warehouse with one tenant may be a riskier investment. Should that tenant leave or default on payments, the risk to the investor is much higher than a single tenant in a multifamily apartment complex or a large office building defaulting or ending their lease.
Location Still Matters
The law of supply and demand still plays a significant role in the viability of any CRE as an investment. Generally, if the property is in a stable and upward-trending location, it is worth more as an investment than a newer or more upscale CRE property in a high vacancy, low traffic, or remote location.
This is where understanding the market, the area, and the supply and demand for the specific category of CRE becomes a critical factor. This can be a steep learning curve, which is why a commercial real estate agent is an investor’s biggest asset.
Developed and Undeveloped Investment Opportunities for Your Portfolio
One of the advantages of purchasing existing CRE is the ability to begin earning revenue on the property much faster than working with an undeveloped property. For many new investors, this is a critical decision. The other advantage of a developed property is the ability to crunch the numbers and understand what upgrades or renovations must be made to keep current tenants or attract new tenants. The same is not always true for new developments, where it is difficult to determine the demand for the building given a rapidly changing economy. Buying an existing building eliminates these issues but doesn’t eliminate all the risks. Understanding the potential risks for any investment based on your portfolio, risk tolerance, and financial strategy is always a requirement with any CRE purchase.
