How To Invest In Office Real Estate
In this article we provide an overview of the office asset class, highlight key demand drivers including the role of demographics, and conclude with how investors can apply this information to make smarter investment decisions.
Ian Formigle·Posted July 22, 2016
The U.S. office market has traditionally attracted large amounts of investment capital from both institutional and private investors. This sector typically logs well in excess of $100 billion in institutional transactions each year.
A Look Back In History
So given the current economic situation, is it prudent to invest in full-service real estate right now? Look back in history to the last recession and see what happened in the real estate market.
In 2008 and 2009, the residential real estate market tanked due to lenders improperly underwriting loans which caused housing prices to rise to unprecedented levels, only to come crashing down when the bubble popped and many people could not pay their mortgages.
The current situation is nowhere near that bleak, but there are some parallels. The housing market was turned on its head in 2020 as many people saw their needs change and wished to move to larger homes to facilitate Work From Home and social distancing needs. Interest rates were pushed down to historically low levels by the Federal Reserve as a way to allow the economy to deal with the COVID shutdowns.
Now that the pandemic is over and rates are rising, the housing market will come back down to healthier levels, if not crash altogether. Lets look back to 2008 and 2009. The commercial market fared much better than the residential market. We know from history that this is often the case. The commercial market has always been safer and significantly less volatile than the housing market.
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Plan For Business Disruption
Another important issue that often comes up before, during and after the move, is the loss of productivity and sales. Many entrepreneurs dont realize how much of their attention a move is going to demand. Make sure you have a plan to help you manage transition and change effectively when moving into your new commercial space.
Im Likely Going To Refinance The Building Soon
Im planning on refinancing this project in the near term.
The partner that brought this bank into the deal doesnt work with them anymore and theyre disappointingly unresponsive and unwilling to work with us, despite having an agreement.
Considering the fact that rates are low right now and I have a number of better local lending relationships, Ill refinance the project to pay off our current loan and move on.
You want to constantly be reviewing your loan documents to monitor when you should start the search for a refi.
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The Downside Of Investing In Commercial Property
While there are many positive reasons to invest in commercial real estate over residential, there are also negative issues to consider.
Time commitment. If you own a commercial retail building with five tenants, or even just a few, you have more to manage than you do with a residential investment. You can’t be an absentee landlord and maximize the return on your investment. With commercial, you are likely dealing with multiple leases, annual CAM adjustments , more maintenance issues, and public safety concerns. In a nutshell, you have more to manage and just as your tenants have to worry about the public eye, you do as well.
Professional help required. If you are a do-it-yourselfer, you’d better be licensed if you are going to handle the maintenance issues at a commercial property. The likelihood is you will not be prepared to handle maintenance issues yourself and will need to hire someone to help with emergencies and repairs. While this added cost isn’t ideal, you’ll need to add it on to your set of expenses in order to properly care for the property. Remember to factor in property management expenses when evaluating the price to pay for a commercial investment property. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration. Evaluate beforehand whether you want to manage leasing and the relationships yourself or outsource those responsibilities.
How To Get The Most From Commercial Properties In Pune
From the basics to devising strategies that always keep the space occupied, these three ways can help you make the most of your commercial space in Pune.
- Location, Amenities, and Surrounding Development
The way to a higher RoI starts with the right decision. Accordingly, to make the most from your commercial real estate investment in Pune, you must choose the right location that precisely offers potentially lucrative business opportunities for your prospective tenants.
For instance, if you are buying a space large enough for an IT firm, choose a location that offers excellent connectivity, is proximal to the citys hotspots, and has surroundings that help maintain the businesss decorum.
Also, calculate the potential rent or lease income you may earn from the property and how early you will be able to recover your investment. You may buy the property if the propositions are worth and aligned with your investment goals
In addition, review the amenities offered. Modern entrepreneurs dont merely look for offices but spaces that provide better working experiences. The availability of modern amenities can make a significant difference.
- Align The Space Per the Target Tenants Needs
It means looking for convertible or flexible spaces that allow you to do modifications per your prospective tenants needs. Rigid spaces may limit the scope, making it difficult to find a tenant. It may take time to find a tenant for whom your space is a perfect match.
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But As A Commercial Real Estate Investor You Should Always Consider Selling
If an opportunity comes along that you should take, theres no reason to be stubborn and not let go of a property to free up that cash simply because you dont want to sell.
While I prefer to hold all of my assets, I have sold of some because they allowed me to roll money into an even better deal or into a better location for where Im working.
You never know when the right time will be to sell, so its always best to prepare for one, no matter what.
How I Underwrote The Project
Underwriting is probably the most crucial piece of investing in commercial real estate.
Remember – you do NOT want to get emotionally attached to any of these opportunities and investing in commercial properties can be very black and white, if youre disciplined.
Either the numbers work, or they dont.
There are certainly times where you can make exceptions to this rule, but youre going to be making more of a strategic bet, which isnt as secure if youre operating based on the numbers.
Heres how I underwrote the office building.
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Find A Broker That Specializes In Your Chosen Property Type
Get on their mailing list and review every email they send. Underwrite & tour every property that closely fits your criteria. But most importantly, have conversations with them about the properties.
Why do they like this site? What are the drawbacks? What is their anticipated OpEx?
Brokers want to bring you deals that will be successful so they can continue selling you properties in the future.
What Makes A Good Industrial Investment
When looking for an ideal industrial investment you should consider the following factors:
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What To Look For When Buying A Warehouse
Now, lets discuss what to consider when buying a warehouse for the best investment.
Location always comes first when buying real estate. A warehouse property thats located in an industrial area may be more affordable than one on the interstate, but it may not have the accessibility that tenants need.
Carefully consider whether or not the property has the features you need for your intended use. Here are just a few examples of questions you should ask:
- Does the building have overhead cranes or lifts? Can it support them if you want to add them later?
- Are there loading docks? This is a plus and probably cannot be added later without considerable expense.
- Is there sufficient parking and turnaround space for vehicles bringing and picking up the products being stored there?
- Can you add value to the property? For example, is the building large enough to create office space? Or, is the lot large enough to expand the building?
Go to the website for the states transportation agency and look up any planned improvements for the area. There may be good things ahead such as widened roads or improved highway access. On the other hand, you could be in for long-term access interruption.
What is the rent and maintenance history of the property? Ask for the previous years utility bills. Property owners can get a years billing history from their water and electricity providers. Also look up or ask for the property tax bill.
What Is Commercial Real Estate
Residential property only includes single-family homes or those with up to four units. Usually, only families or individuals lease them. But commercial real estate is generally for business purposes, including five or more units.
You can break commercial real estate into five main categories:
- Multifamily: Essentially, multifamily homes are residential properties with more than one unit, like duplexes, garden apartments or assisted living facilities.
- Office space: Theyre designated as low-, mid- or high-rise based on size, and allow for multiple tenants. Examples include medical offices and suburban office buildings.
- Retail: This type of real estate is designated for businesses that sell goods or services to consumers. Theyre usually located in places conveniently accessible, like regional malls and strip shopping centers.
- Industrial: These properties range in size, like office spaces, and they host industrial operations, such as heavy manufacturing or light assembly.
- Hospitality: This covers establishments that service travelers, whether for meals, accommodations or entertainment, like hotels and short-term rentals.
Commercial office properties face further classification and are broken into three class gradings:
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How To Get Into Commercial Real Estate
Figuring out how to buy commercial property isnt exactly like buying a single-family home. The experiences differ in more ways than one. The costs, for example, can be steep with commercial real estate, and it may be harder to secure funding. In addition, if you dont already have tenants, then its up to you to cover expenses during lengthy periods when the properties are unoccupied.
Not only that, but valuation for commercial property is often difficult. Its generally harder to find comparable properties for commercial real estate than residential. Because of these differences, investors should be careful before purchasing.
If you think youre ready to buy or invest in commercial real estate, there are a few steps you can take to prepare for the investment and purchase the right property to achieve your business or personal goals.
Start Your Special Warranty Deed
Answer a few questions. We’ll take care of the rest.
You don’t have to use a real estate agent to find property, but while they can be expensive, they also take the hassle out of finding a suitable location. Information on Buying Property
When buying commercial property, you’ll probably want a Special Warranty Deed. A Special Warranty Deed protects you against liability for the debts of or any damages and problems caused by the previous owner. Pros:
- Your new property can be counted toward your business’ assets. Owning property is typically seen as good long term investment.
- You’ll have a fixed overhead with your mortgage.
- You can get revenue from subletting.
- You have the freedom to manage the property, and use the space how you want.
Cons:
- The high initial investment requires cash flow.
- There’s no guarantee that the property’s value will appreciate .
- You’ll have added maintenance responsibilities.
- You’ll have to make sure your property is properly zoned if you plan any construction.
Information on Renting or Leasing Property
When renting or leasing commercial real estate such as office space, you’ll need to negotiate and sign a commercial lease. The more specific requirements you have about your work space, the less negotiating room you’ll have with your landlord. Leases can last anywhere from 1 to 5 years, and most are renewable.Pros:
Cons:
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Now I Use Spreadsheets And In
Utilizing spreadsheets makes the process far simpler.
They allow me to take into account variations on the rent rate, vacancy, debt, and so much more without having to fully pencil out the equations.
I use the same spreadsheet for just about every project now and will modify it slightly, if I need to, depending on the deal.
You can throw your own together in excel, as well, if you like.
These spreadsheets make your underwriting for projects much faster and more accurate than you could likely do on your own.
If youd like to buy the spreadsheet that I use, .
Things To Consider While Buying An Office Space
Buying a commercial office space involves a lot of risks and high investment. You cannot accurately predict the future but can make few assumptions based on past records and current market trends. Each risk must be carefully analyzed along with the solution. No factor should be ignored thinking that it will never affect your business. Here are some of the factors you should consider while buying your first commercial office space.
Location A perfect location today could turn into an unwanted destination tomorrow. Make sure the location you choose in not under any commercial project development program. At the same time, you need to make sure your business is accessible through various modes of transport for consumers/suppliers. A poorly connected business will die a slow death. The location you choose must have good water, electricity and an Internet connection.
Budget Any real estate investments involve a huge budget and therefore require full-proof planning. Do not begin your commercial exploration before you get your budget right, the budget you have in your hand decides the kind of property you will be able to buy. It is critical for the investor to figure out the amount you need to invest along with other business transactions. If you do not have enough amount you could lease the property with enough downpayment and pay the mortgage for the remaining amount.
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If Yours Is A New Business Or A Company Enjoying Rapid Growth Then An Office Rental Could Be Exactly What You Need
Setting up an office is a major step in the launch or expansion of any business for one thing, its visible proof that your initiative is well past the planning stage and is actually up and running.
But remember that any decisions you make about the office facility itself, such as whether to rent or buy, will have important implications for how your business will be able to develop in the future. So heres a look at some things you should consider when making this finely balanced choice.
Where To Buy A Warehouse For The Best Investment
If you, like other savvy investors, are searching either for the best possible deal or something very specific, we suggest that you look for a warehouse at WarehouseCashin marketplace. At this platform, you can find off-market warehouses at affordable rates, including distressed properties whose owners need a fast sale.
Our marketplaces interface was developed specially for warehouse investors needs. It enables you to easily find the desired type of warehouse and type of deal . You can also view detailed important data that will help you estimate right away how lucrative the investment opportunity is.
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Benefits Of Commercial Property
There are of course many benefits from investing in commercial real estate:
- Strong returns Over the years commercial property has provided strong returns as a combination of capital gain and income.
- Stability of income One of the important features of commercial property is returns are generally high and more secure. Returns for property fluctuate considerably less than returns on shares.
- Low risk There is less volatility in the values of commercial property than in shares if you own the right property.
- Exposure to different sectors of the economy Retail and industrial properties have a direct relationship to the general state of the economy. Retail property depends upon consumer spending.
- Tax benefits Commercial properties provide generous tax benefits with substantial depreciation allowances. Some buildings also attract building allowances, where a portion of the structural cost can be offset against the assessable income.
Ways you can add value to your commercial property investment include:
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