With today’s rebounding economy and real estate market, the return of investment (ROI) from a commercial property can be substantial, especially for buyers who are entrepreneurs at heart and willing to take some risks. But keep in mind that owning commercial space, such as retail centers, industrial parks or office buildings comes with many advantages, as well as some challenges. To avoid potential pitfalls, investors must be prepared to do a lot of studying and be informed before purchasing.
There are many differences between owning commercial property versus residential property. But both property types encompass necessary ownership responsibilities, such as responding to maintenance emergencies and repairs, responding to tenant requests, maintaining service contracts, preparing operating budgets, collecting rents, performing lease oversight, in addition to other special or extraordinary services inherent to property ownership.
Some of the overarching advantages of commercial property ownership are longer leases, higher rents, faster property appreciation, and the potential for higher ROI. Depending on how risk tolerant of an investor you are, disadvantages can include higher capital investment (daunting for novice investors), on-going maintenance costs, insurance-related risks, vacancy rates, and strict compliance, zoning and planning laws. Specific types of commercial property also have distinct pros and cons.
Before you make the important decision to invest in commercial real estate, here is a quick study guide:
A. Make sure you have an experienced commercial real estate attorney or broker, licensed in your state, to look out for your interests. Commercial real estate agreements can be complicated as they adhere to strict, by-the-book legal proceedings. Do not try to maneuver this on your own or with an uninformed representative who is not well versed in every nuance.
B. Carefully choose the right type of commercial property. Among your options are:
- Retail space – such as, stores, restaurants or any place where people purchase goods or commodities. Pluses: Potential for high yields, low maintenance, and long leases. Potential Minuses: Shifting customer tastes, higher initial investment and changing economic conditions.
- Office space – buildings with office users or tenants segmented into Classes A, B or C. The spaces can include building amenities such as physical fitness centers, food facilities or child care centers. Pluses: Longer leases, clearly identified operating hours, and tenants with an interest in the property’s appearance and operational performance. Potential Minuses: changing economic conditions, and large tenant base.
- Industrial space – such as manufacturing facilities, warehouses or storage spaces. Pluses: Potential for high yields and long leases. Potential Minuses: Changing economic conditions, lower rents and vacancy rates.
C. Strongly consider hiring an excellent commercial property management firm. Why? Because a commercial real estate investment is on a business-to-business plane, which means the stakes are higher. Your response to your tenants’ issues must be swift, thorough and professional. And you need an experienced company who can handle it all in an expert manner. And when we say ‘all’ we mean:
- Negotiating contracts for physical plant issues and vendor services, such as janitorial, landscaping, lighting, parking lot appearance, and maintenance systems
- Vendor contract services, including contract bidding and review to ensure cost-effective maintenance
- Construction Management that provides value through knowledge, negotiating expertise and organizational skills
- Rent Collection and enforcement of leases
- Keeping up, through continuing education, all property laws, trends, and shifts
- Performing site inspections and reports
- Carrying out all necessary tenant, maintenance and contractor credit checks
- Tenant Response, including complaint resolution
- Compliance to regulations and laws surrounding commercial property
- Energy Management & Sustainability Practices to reduce operating expenses by promoting energy conservation and efficiency
- Crisis, Safety and Risk Management, including prevention and management of disasters, adherence to safety policies, and verification of appropriate insurance levels
- Hiring and managing any necessary on-site maintenance personnel
- Accounting Reporting and Procedures, including annual budget preparation, accounts payable / receivable, general ledger recording, year-end audits, tax responsibilities, CAM reconciliations, and financial reports
- Adherence to business plan and goals
- Giving you peace of mind
Meissner Jacquet Commercial Real Estate Services, a San Diego-based commercial property management firm, provides three important things to property owners and operators, confidence, stability and relevant solutions. Tim Meissner, a Principal at Meissner Jacquét, says that what sets their firm apart is that “we allow our clients to excel. We’re in business to enhance the ownership experience by aligning our clients’ financial and business ambitions.” Hiring the right commercial property management firm can add value, by saving you time, money (yes, money) and untold stress.
National Association of Real Estate Investment Managers
National Association of Realtors