Most commercial real estate investors specialize in just one or two property types. However, even experienced commercial investors don’t realize the impact another totally separate market can have on their properties.
When evaluating a commercial real estate property it is essential that you ask yourself this question: how many of them play off each other and are related in ways most of the investors don’t think about?
Let’s view some commonsense examples in today’s economy and how different groups in the commercial real estate income property or investment properties either help or hinder each other.
Today’s immediate forecast looks promising for most sectors such as , warehouse, storage and assisted living private pay, and medical offices to name a few. The job market is gaining ground and as a result commercial spaces for growing businesses are being built at a rapid pace.
Here are some examples of commercial real estate properties that are trending right now:
The demand for warehouses is growing, but not by the usual manufacturers or distributors; instead, it is large internet companies needing distribution channels for quick delivery – as in Amazon – who are snapping up these spaces.
Apartments usually need extra storage for their dwellers, which were the climate control storage places come into play and become a hot investment commodity.
The medical office needs to be near hospitals to surface their patients properly and most doctors team up to be more efficient and share costs among themselves to keep ever-rising insurance premiums down and office expense.
Unless we hit a snag in the economy, like another recession (which is always possible), the commercial sector will continue to grow. This is especially true in the suburbs or tertiary areas. Unlike the downtown sectors of major cities, these are not overbuilt and don’t have rents that have a hard time meeting their expenses.
There is an abundance of forms of commercial real estate and some are a combination of business and commercial real estate while others like Triple Net Leases have no responsibility to the landlord. Of course, lower returns for no work or little risk is usually the case for the Triple Nets while the storage or apartment complexes usually gain higher returns due to the responsibility to the landlord.
Most lenders are open to lending on all these types of investments although loans may differ in terms of interest rates, equity needed and length of time of the loan. The expectation of 3.75 to 5% is the various rate quoted today with 25% to 40% down payment required for a purchase or refinance. Usually, there is no prepayment penalty and maybe 1 point to get the loan.
The overinflated areas of Manhattan, San Francisco, and Seattle or Miami may be very pricey for most investors.
However, investors are willing to pay based on a calculated assumption that these cities will always provide high prices: these are properties that are confined to a certain type of population explosion and by the need to live there.
Japan learned a big lesson overpaying many years ago for U.S. real estate in some of these same cities – when the economy got bad they suffered large losses when selling. Some people need to sell due to medical reasons or other tragedies, but if you can hold out till the market recovers which is fine most of the time.
When internet companies gain more traction the brick and mortar retail stores most likely will get hurt. When too many developers start to build too many of the same type of commercial buildings in the same area everyone gets hurt except the tenants who will pay less rent and even get free rent.
Thus as you can see, the groups play off each other based on the economy and the population trends and over-eager developers all wanting part of the profits at the same time.
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