When choosing commercial real estate as an investment, many new investors want to purchase a specific type of property within their budget. They typically have an idea of the ideal building or property that they want to own. While these issues are important, particularly budget and property type, there is a more effective way to consider any commercial real estate investment.
A better way to evaluate any new commercial real estate opportunity is to look at what your potential new tenants want and need.
This creates a more effective way to evaluate the property’s current condition and understand any modifications, upgrades, or revamping that needs to be done to the property to retain existing tenants and attract new tenants. The best way to approach this is to think like the tenant. Considering what they want helps to determine how viable the building is to start earning revenue or what the costs would be to get it to that point.
When businesses are considering a place to lease, there are several factors they consider. Evaluating your potential commercial real estate against these criteria helps to get a clear picture of the potential benefits and challenges of making the purchase.
- Location – this is always a given in commercial real estate. The building and property must be located in an area that has easy access to transportation, parking, and is located near their customer base.
- Other businesses – what other types of businesses are in the specific area? Are there similar businesses to the type you anticipate attracting to the building? A retail store or a professional office in an isolated area is less likely to appeal to new tenants than one with similar types of businesses that bring in traffic.
- Rental rates – what is the going lease or rental for similar spaces in the neighborhood? If the rent or lease prices are trending downward in the area, it is essential to consider this factor in determining if this is the right building to buy.
- Current technology integration – most businesses today require more than the basics in technology. As companies of all sizes move to remote or hybrid work, having a technology infrastructure in a commercial real estate investment is increasingly essential for tenants. If the building does not have this in place, what will the cost be to bring it up to current requirements?
- Options for expansion – is the building designed to allow tenants to expand their space as needed? This is a critical factor for many startup companies that only need limited space immediately but anticipate requiring more space in the future.
- Current tenants – are the current tenants in the building a good match for your ideal tenants, or will they hinder attracting the types of businesses you want in the building? This may include their industry, office size, and even the type of work or service they provide.
Considering a commercial real estate purchase from the perspective of having to lease out space is a helpful exercise. It can also be a simple way to highlight any challenges or problems with the building before making an offer.
