Types of Commercial Real Estate that Will Be on the Wave in 2013/2014
October 31st, 2013 by Diane Moore
Commercial real estate provides a very good investment opportunity that gives you the chance to get the most out of the service resources and available trade. Additionally, it enables investors to create new and exciting networks and resources.
With accurate information and proper infrastructure, various commercial real estate investment options form a highly profitable portfolio that is likely to achieve maximal productivity and profitability. Commercial real estate that will be in highest demand in 2013/2014 mainly comprise of investments that will provide products and services of the highest quality to both customers and clients.
In the modern world, business and technology are developing and growing at a very high rate. As new forms of networks, social media and up-and-coming innovative business ideas develop the so-called client bases and business markets. Therefore, business owners and entrepreneurs are constantly faced with a wide range of new challenges especially in this era of harsh economic curveballs. However, several areas of the commercial real estate niche provide investors and businesses with the opportunity to expand and grow their marketability.
Retail centers can accommodate a wide variety of tenants including service businesses and retail tenants, medical centers, restaurants, church or even school. As a result, this has become a very popular type of commercial property that investors are currently looking for. Therefore, they are always in high demand since there are very few sellers and more buyers.
- Multi-tenant strips
The main advantage of this type of investment in the current market is that when tenants move out, you will only lose a small portion of the total income before you find new tenants to move in. It provides a great opportunity for investors to spread risk.
- Single tenant building
The advantage in this type of investment is that you only work with one tenant. Additionally, some tenants sign 10 to 20 years leases that are mainly guaranteed with their corporate assets which are mostly worth billions of dollars. This ensures that your investment is very safe.
- High quality tenants
Most high quality tenants have lo0ts of assets, good credits, and they always pay the rent promptly when due. You also don’t have to worry about finding new tenants since they often sign long term lease contracts of between 5 to 30 years. The main advantage of this type of investment is that they always keep your property in good condition. Moreover, they may even spend their own money in order to attract clients and customers to their stores and offices.
- Triple net leases (NNN)
Leases for retail are often in favor if the investor or landlord. Tenants pay the base rent and also reimburse the landlord for insurance, maintenance, property taxes or even property management fees depending on the terms of the agreement. This is very vital especially in the prevailing economic conditions mainly since it takes a lot of risk away from the investor. NNN leases can be viewed as litmus tests on whether the commercial real estate property is on high demand or not.
These commercial real estate properties can be single or even multi-storey buildings. In the modern business world, the two storey office buildings that lack elevators are slowly being phased out since many service businesses may also have customers and clients that are physically challenged and hence cannot walk up the stairs.
Just like the retail or shopping centers, office buildings can house a single tenant or several tenants. Single tenant building are often used as the corporate headquarters of big corporations. Though such tenants sign long lease contracts and are also high quality tenants who pay the rent promptly, single tenant buildings can be quite sensitive to the economy since it may be hard to find a single tenant to occupy the entire building.
However, multi-tenant office buildings are very stable investments. This is due to the fact that such offices are leased by small businesses such as real estate brokers and accountants. Therefore, multi-tenant office buildings are a great investment opportunity in the commercial real estate sector in the year 2013/2014 especially for investors who want to spread out the investment risk.
Lease for office buildings vary from full service offices where the landlords pay for utilities, maintenance, property tax, and insurance to the triple net leases (NNN) where tenants pay property taxes, utilities and also the maintenance.
Offices can be of several categories including sub-urban garden offices, sub-urban high rise offices, medical offices or even CBD (Central Business District) offices.
Potential office buildings can be very sensitive about the location. They shout have a minimum occupancy of 85% and the building should be easily accessible and located on or near a main thoroughfare. However, it is important to note that properties where more than 20% of the total revenue comes from owner affiliated tenants or owner occupied have higher interest rates on any loans.
Hotels are mainly characterized as limited service or full service. Full service hotels are further subdivided into upscale, luxury, mid-scale and. Additionally, limited service hotels are further divided into economy, mid-scale, budget, and extended stay hotels. When considering investment in commercial real estate in the hotels properties niche, the property should always have a very stable operational history in order to earn the confidence of customers and clients. Therefore, a hotel property with a stable history of at least five years should be properly scrutinized. The minimum occupancy for hotels should be at least 60%. Moreover, lenders in the current real estate market prefer franchise affiliated hotel properties that have franchise arrangements that extend beyond the term of proposed loans.
Buying a hotel or motel is like a double edged sword since you will buy the real estate property and also a 24 hour per day and 365 days per year business. It is vital for every investor who is ready and willing to invest in hotel property to understand that this business requires strong marketing skills and hard work in order to get the hotel rooms filled since the rooms are worthless when they are vacant.
Some investors also prefer investing in brand names such as Pizza Hut, KFC or Burger King which are more inclined towards the restaurant side of commercial real estate investment. In most cases, these are single tenant properties which do not require any management responsibilities from the owner or landlord. However, the cap rate or rental income for these hotels or restaurants is usually lower in the range of 5% to 7%. Emerging regional hotel and restaurant brand names such as Johnny’s Carino’s, Zaxby’s, and Tia TexMex are offering higher cap rates ranging between 7% and 8.5%.
In order to ensure that they make profits, restaurant operators usually sell the real estate to other investors higher cap rate and then lease back the property for periods ranging between 20 and 30 years. The sales proceeds they get are mainly used in the expansion of their businesses mainly by building more restaurants. Therefore, investors who are willing to take higher risks enjoy the reward of high income from these restaurants that are now emerging at a very high rate.
Multi-family buildings or apartments are usually among the most preferred choices for most new commercial real estate investors. Apartment management and financing is very similar to the residential properties so most new investors feel very comfortable with such investments. However, the main downside of multi-family buildings is that they are management intensive.
In order for a multi-family property to be considered commercial real estate property it must have at least 5 units.
There are several sub types of multi-family apartments:
- Mid-rise apartments
- Low-rise garden apartments
- High-rise apartments
- Military housing
- Co-operative apartments (Co-op)
- Town house style
When looking for multi-family property to purchase, you must pay close attention to the location and the general market for that specific area. This will ensure that you avoid properties that are located in seasonal or economically depressed areas. Moreover, the property you chose to invest in should have acceptable aesthetic qualities in order to be competitive with the current market standards and also have an 85% minimum occupancy.
Property that is located in an economically depressed area or has poor or rather inferior physical characteristics may have higher reserves, higher interest rates or tighter underwriting constraints.
The reason why multi-family property is regarded as a management intensive investment is because of the high turnover rate. The leases are usually short term often month to month. Even though investing in apartments can be quite profitable, they tend to have a higher late payment history mainly because the tenants may have a tight budget. Therefore, apartments are viable investments for investors who are ready to cope with such shortcomings.
Keys to successful commercial real estate investment in apartments include:
- Minimizing or controlling expenses
This may sound like a minor task until you see the list of expenses provided by property managers. These expenses mainly include advertising, bank fees or charges (for insufficient funds), coin laundry subsidy, accounting, capital improvement, garbage disposal, collection fees, cleaning, landscaping , legal fees (eviction), offsite property management, painting, pest control, on-site property management, repairs, painting, security, utility, water and property taxes. Property managers usually increase the expenses thus lowering the profit margin.
- Invest in property that is in a good location and without any differed maintenance.
- Stay away all areas with any form of rent control such as Berkeley.
Apartments have a very high occupancy rate since everyone needs a roof over their heads. This is the main reason why apartment have a lower interest rate (often 0.025% to 0.05% lower than other commercial real estate properties).
This type of commercial real estate property includes assisted living centers, congregate care centers and nursing homes. The property should be close to community and retail services. On the other hand, you should ensure that the property you chose to invest in complies with all ADA requirements.
Medical buildings include all properties that are leased primarily by dentists and doctors. In most cases the best medical buildings are usually located close to hospitals (across the street or in front of hospitals). Investing in medical buildings is a safe and very stable commercial real estate investment option mainly because medical tenants are recession proof. Therefore, most investors prefer investing in medical buildings as long as all conditions allow.
As education centers crop up and expand day by day, the demand for student housing continues to rise. This has created an opportunity for investors to take advantage of by investing in student houses. However, such property should be close to the institutions in order to ensure that students can easily access the school. This has proven to be quite viable especially around institutions of higher education such as colleges and universities.
Student housing is a stable investment since it is not easily affected by the recession since the students must have a roof over their heads while studying.
Such commercial real estate property types have their usage limited to industrial purposes only.
- Single tenant warehouses
- Multi-tenant warehouses
- Flex space
- Research and development
- Heavy industrial
- Light industrial
Additionally, self storage buildings or mini-storage rooms may be leased by consumers or even used for personal storage.
When aspiring to invest in commercial real estate property especially in the current economic conditions, there are several options and factors that must be considered in order to ensure that your investment is profitable and that it actually pays off. These factors have a huge impact on the prosperity and productivity of your business venture. For instance, in areas where the demand for profitable space is considerably high, availability and cost may vary according the size and location of the facility.
Some organizations and businesses may find it quite advantageous to establish a facility away from their competitors as a good way to stand out and create a new customer base by expanding into new and diverse markets and consumers. As proven by the current economic conditions, finding a good place to continue or create a successful business is very important.
Businesses such as firms and retail outlets are looking for urban places to centralize all their operations therefore; they may invest in areas with commerce and a market that is easily accessible. On the other hand, industrial companies and manufacturers prefer operating in rural areas where there is sufficient space to suit their ideal business model. Their purpose and pursuit may necessitate the availability of many accommodating structures that will help reach or even exceed the goals and visions of the company.
Latest posts by Diane Moore (see all)
- Tips for Making your Commercial Property more Energy-Efficient - January 22, 2014
- Remodeling Investments that Will Pay You Back - January 21, 2014
- 21 Reasons to Invest in the US Commercial Property Market - January 20, 2014