Investors must consider various factors when choosing the right commercial real estate (CRE) property. Expertise in the market is valuable for recognizing opportunities, and experience can help determine priorities. The goal is to determine if the property fits the investor’s broader financial objectives and risk tolerance.
Four types of CRE investments
Here are the pros and cons of the four main types of commercial real estate:
Office buildings
Investors often like office properties because the leases tend to be longer, and turnover is low because moving a company is complicated and expensive. Conversely, long leases mean infrequent lease increases unless they are built into the lease agreement. Owners may also have to make costly improvements so the space works for a new tenant.
Industrial space
Investors often like the predictable cash flow, less operational risk, and capex requirements. Still, there may be a significant physical footprint and high upfront costs if the property needs work. Industrial space can also be highly vulnerable to economic downturns or disruptions.
Retail space
This property type can have high visibility and can command long leases for established tenants. However, changing market tastes and neighboring properties can deeply impact the value. Retail property may be built or designed for a specific tenant or type of tenant which provides assurances up front but can make it difficult or expensive to fill with a new tenant.
Multifamily housing
Multifamily housing is often stable even during an economic downturn. There may be unique opportunities with financing. Larger projects have more tenants, so rental income can be consistent even as renters come and go. Compared to other types of CRE, multifamily tends to be higher maintenance with shorter leases, and greater collections for occupants (or former occupants) who owe money.
Finding the right fit
Investors or investment groups should carefully evaluate the property’s pros and cons to ensure the purchase makes sense. Along with working with a realtor, a real estate attorney will be a valuable part of the team in closing the deal, negotiating the terms and working with lenders.