Considerations Before Investing in Commercial Real Estate

 Investing in commercial real estate is a good way to earn regular income. However, there is much more to simply buying a piece of property. Before investing in commercial real estate, there are several important factors to consider.

Unlike most other investment options, commercial real estate doesn’t suffer from market volatility. However, market shifts can affect certain aspects, such as the vacancy rate and the stability of tenant occupancy. Therefore, a deep understanding of the property market is key, particularly of the area you are targeting. This includes the latest economic trends, including trending job sectors, unemployment rates, and current state and federal property taxes.

Keep an eye on what business activities are driving the local economy. That helps to understand which commercial real estate assets are hot. Remember, every state has a different level of demand and supply of commercial properties. You need to research and carry out your due diligence.

Property redevelopment is a common strategy among commercial real estate investors. However, such projects require due diligence in zoning ordinances and building codes. Before you initiate any redevelopment, consult the local building authorities.

Get a zoning report, which can give you valuable insights into the area's building and zoning compliance requirements. This will inform your investment decisions and also avoid potential zoning disputes later.

Know the long-term viability of your commercial real estate. The existing tenants, the current tenancy terms, and their financial condition are factors that say a lot about the long-term asset viability and whether the investment is likely to be profitable. Historical vacancy and lease terms data will give you an idea of how you need to prepare in the event of a tenancy gap during the period of your investment.

When investing in commercial real estate, always factor in property taxes. High property taxes could potentially eat into your rental income. As a general rule, in metropolitan areas, expect higher property taxes and lower rates in more rural places.

The year 2020 marked a major milestone for Environmental, Social, and Governance (ESG) investing. Due to the COVID19 pandemic and climate-related disruption, real estate investors were pushed to adopt more robust sustainability approaches. While the shift to net-zero emissions and energy savings may be easy to implement for office tenants, as a commercial property investor, you will need to find solutions for your retail occupiers (if it applies to your property). They typically use energy-intensive lighting for window and product displays.

As the trend toward tighter ESG compliance accelerates, you must stay on top of a rapidly changing environment as a commercial real estate investor. You have an opportunity to drive positive changes with new technology and green leases. Green lease refers to different clauses and documents that contain environmental obligations.

For example, in 2021, the U.S. Department of Energy (DOE), through the “Better Buildings Initiative,” awarded 43 organizations nationwide with the Green Lease Leader recognition. In Singapore, the City Square Mall had tenants agree to integrate green practices into the premises. In car parks and escalators, the mall has installed energy-saving auto-lighting.