Notes for Commercial Real Estate Investments

Commercial real estate is defined as property that is used for the purpose of commerce. For example, an office building, a warehouse, retail store, shopping center or an apartment building with five or more units.

Today in 2010, due to the global recession since 2008, there is a much higher supply of commercial real estate than its demand, and hence the prices are attractive and can be negotiated hard by interested buyers.

We expect that commercial real estate prices may correct by 10-20% in 2011 depending on the country and city. In general one can’t go wrong with buying commercial real estate (office space, rather than shopping malls) in big cities if the time frame is 5-10 years.

The risk-reward is more in commercial property than in residential property. Commercial real estate returns can give attractive over 5-10 year period; much better than you would get from residential real estate of the same proportion.

Location is very important in commercial real estate. Our experience has been that “it is better in general” to have a small space at a busy city-center/downtown place, than to a big space at a suburb.

London and New York are two cities that will deliver good returns despite recession if you can invest for 5-10 years. Irrespective of where you are in the world, see if you can invest in commercial property in high growth cities like Mumbai, New Delhi, Hong Kong, Shanghai, etc. These cities can deliver 5x returns in 10 years.

Buying, selling and evaluating commercial real estate is a complex process. If you are an investor, or an aspiring investor, banker or real estate professional, acquire a better understanding of commercial real estate by learning key terminology and quantitative concepts.

Commercial real estate is made up of all property that is for sale or rent. It does not include residential buildings. The property will appreciate as long as people are selling things and offering services to the public – using a brick and mortar set-up.

Given the low interest rates of today for 10-20 year loans, one can purchase commercial property on attractive terms.

Commercial real estate is characterized by six principles:

  1. location
  2. financing
  3. timing of market cycles
  4. leasing
  5. ownership structure and
  6. external factors.

From the perspective of the developer, lender and investor, there are five basic types of commercial real estate: office, industrial, retail, multi-family, and hotel.

Leasing commercial real estate is a process – a lot of ideas and knowledge that combine into a successful lease agreement that meets the needs of all the parties involved. Lease documents will likely contain new provisions to modify the established rent on day one of the lease.

Just like passing the gas station, the price of construction changing from one day to the next will force landlords to increase rent between the execution of the lease and the move in day.

commercial real estate

But supply eventually begins to outstrip demand, causing rents to fall and capital values to tumble. Finally, a period of relatively little construction – like that experienced by many Western countries for the past several years – leads to under-supply and a rise in prices.

You could take up commercial real estate for either reselling after appreciation or for renting out to, say, retailers.

Office building leases can also be simple month to month rentals. Office centers also have facilities such as FedEx, UPS and other delivery companies that you may need and therefore good to know where they are located as well.

Please Note: The increasing use of the Internet for work and e-business is a factor to keep in mind. It reduces the demand for commercial real estate and probably shifts the demand to higher quality residential real estate. So you have to select locations that will remain important in the coming years. Commercial real estate is a long-term investment so please do your homework and find a property that can make you money over the long haul.

About the Author:  Shankar AVSB runs MyOrbit Online, of which is a part. He is a real estate investor and follows real estate industry developments across America, Europe and Asia.  He is also leads 7Avenues, a private equity with ventures in Retail, Farming, Financial Services and MarketStar Capital, an investment services company. He can be contacted from here.

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