As we’ve previously discussed, there are many benefits to investing in commercial real estate. But after over a year of chaos amid a global pandemic, you might find yourself asking, is it a good time to buy a building? Let’s discuss elements you should consider before investing in commercial real estate.
The Benefits of Investing in CRE
“The wise young man or wage earner of today invests his money in real estate.” —Andrew Carnegie
First, there are three benefits in particular that we are going to cover today—some might refer to it as the CRE trifecta!
One huge benefit of investing in commercial real estate is tax breaks. When you own property, (or for the sake of this article, a building), you can deduct mortgage interest, depreciation, and operating expenses as a tax write-off. For those who are strategic, capital outlays, such as new parking lots or roofs, can be expensed as well.
We know that real estate value increases over time. Given this, another benefit of buying a building is capital appreciation. Appreciation will vary based on local supply and demand, interest rates, inflation rates, and additional factors.
It’s important, however, to consider the ages of the investors. Appreciation can take many years, so for those who are older, they may end up passing down properties to heirs who will be the ones to see the increased value.
Rental rates will increase over time, by a fixed amount or as a result of changes in the Consumer Price Index (CPI), for those who take on a series of short-term leases (typically three to five years).
On the other hand, when you purchase a property, you can achieve stable costs by using a fixed-rate debt that can fully amortize over 20 to 30 years.
So, with all of these benefits, why does anyone lease or rent a commercial property? Why not buy? What needs to be considered prior to investing in commercial real estate? Let’s dive in.
For additional details on the pros and cons of leasing and/or owning commercial real estate, check out this article.
Elements to Consider before Investing in Commercial Real Estate
1. Economic Recovery
To most everyone’s delight, after over a year of chaos due to the COVID-19 global pandemic, the economy seems to be improving. Things, however, are not completely “back to normal,” as some might say.
Over the past months, the Southern California commercial real estate market has begun to again gather steam, as put by CoStar. For more on commercial real estate sales post-pandemic, visit this article.
2. Space Needs
Is your company growing rapidly? If so, purchasing property may not be your best bet. By leasing a commercial property instead, you gain the flexibility to accommodate your growing business in the future.
In fact, research shows that if your business plans “to stay in a single location for less than 7 years, then leasing might be a better option.” This research takes into consideration monthly recurring costs, tax savings, asset price appreciation, increased business equity, up-front costs, opportunity costs, and money earned in the sale of the property.
3. Down Payments
While purchasing property is a great long-term investment, it requires a great upfront cost to do so. (Traditional loans typically require between 10-25% of the commercial property’s total value as a down payment). And in some cases, this cost might include not only the down payment but also improvement costs, appraisal fees, loan fees, and more.
The process of qualifying for necessary loans or financing can prove to be a big hurdle when buying commercial real estate. While not currently an issue, high interest rates can make leasing a more cost-effective and attractive option, especially if interest rates get upwards of 10%.
But what about those who are waiting for a ‘deal’? To this, Jammie Jelks of Legacy Home Loans says, “the best time to buy a property is when you can afford to. There’s no need to wait for a down market where you try and get a ‘steal.’
“If you can afford to buy, then buy. If you cannot afford to buy, then don’t. A down market for one is not a down market for others.”
5. Company Structure: Publicly Traded?
Generally, publicly traded companies—for example, Apple, Microsoft, JPMorgan Chase, and so on—tend to steer away from building ownership. This way, depreciation won’t impact revenue.
6. Partnering with a Commercial Real Estate Professional
Given the events that have transpired in the past year and a half, it is even more important to consider partnering with a CRE professional when it comes to purchasing commercial property. A top-notch broker has access to timely, accurate market data and is an expert in their local industry.
For more on what a Commercial Real Estate Broker does for you, visit this article.
CRE Properties Thriving Today
The commercial real estate sales landscape, of course, looks different than it did prior to the COVID-19 pandemic.
Prior to the pandemic, commercial property performed successfully, including:
- Convention hotels
- Office buildings in downtown spaces
- Tenants in mall sectors
These property types, however, did not thrive during the year 2020 and the first half of 2021, according to Real Capital Analytics, as a result of stay-at-home orders and for many businesses, closed doors, reduced capacity, or other limitations.
On the other hand, there were a handful of commercial properties that not only stayed above water but actually performed well throughout the pandemic. Today, investors are continuing to flock to:
- Apartment buildings with desirable amenities (although rent declined at the start of the pandemic, it has been on a solid upward tick ever since, according to CoStar)
- Life science spaces
- Hospitality (on its way to recovery)
- Industrial properties
- Storage Spaces
In fact, “industrial demand has outperformed as e-commerce and medical device firms expand,” according to CoStar.
A Final Word
At the end of the day, the decision to invest in commercial real estate comes down to your unique business and its needs. It is helpful, however, to look at the current economic environment, trends, and your specific business when making a decision.
Regardless of your choice, you’re not alone in this process. At Voit Real Estate Services, our brokers have the experience to negotiate the best deals with your best interest at the core of everything we do.
Ready to make the big move? Read our blog for tips on how to secure quality commercial office space.