Commercial Real Estate Investment Analysis


Know The Market Area And Supply And Demand

CI 101 Financial Analysis for Commercial Investment Real Estate

One of the most important things to know before investing in commercial real estate is that every market is different. When you invest, you are investing in a specific geographic area that has its own unique supply and demand. Certain property types may be doing well on a macro level but you may find there is an oversupply in your city, or vice-versa. Often times investors fail to conduct enough market research to determine if there is a potential risk of market saturation.

A good place to start is researching the market supply in your immediate area, taking into account both the current rentable square footage and any additional square footage that will come from current construction and planned developments.

If you have identified a property type that is undersupplied in your specific market, you can get a feasibility study to outline the future growth and likelihood of success in that sector., Deloitte, CBRE, and Mordor Intelligence are great resources for this.

Financial Consultants Or Advisors

There are many real estate consultants and advisors that can be utilized when evaluating a commercial real estate deal. In fact, most deals will involve at least a commercial real estate broker and a real estate attorney. It is always best to hire your own real estate professionals rather than relying on those representing the seller this ensures they will always have your best interests in mind. Anyone who is considering investing in commercial real estate will also want to consult with their CPA or other financial advisor to ensure the investment is aligned with their broader long-term investment goals.

Real Estate Investment Banking

Real Estate Investment Banking relates to the groups at investment banks that advise real estate, gaming, and lodging companies on M& A deals and capital markets activities.

This is different from brokerage and development/acquisitions groups because REIB focuses on entire companies, not individual properties.

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Real Estate Financial Modeling Courses & Interview Preparation

Like any highly-paid field, real estate is a competitive field where companies expect new hires to be able to hit the ground running and add value immediately.

Thats why many future commercial real estate professionals invest in specialized courses and training to help them get noticed, get hired, and get promoted.

Good luck!

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The Truth About Real Estate Market Analysis

9780324305487: Commercial Real Estate Analysis and Investments ...

In this case, the conclusions are simple: were probably too optimistic with most of our assumptions, ranging from rent and expenses to renewal probabilities to likely changes in average rents.

But thats also because were looking at this from an equity perspective , which means that we need some amount of optimism to sell the deal and get others to buy into it.

A lender analyzing this deal would use much lower numbers and find ways to justify below-market rates for many of these assumptions.

In tests and case studies, you dont need to do much more than what we did here: review the provided data and make sure your numbers arent too far off.

But in real life, you might go far beyond this with on-the-ground research, interviews, and more.

Different firms and groups have different standards for this process, so maybe its not so surprising that articles about real estate market analysis present wildly different views.

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Triple Net Lease / Retail Financing

Triple Net Leases and retailing financing are typically based on the following factors:

  • The term of lease is examined to determine the amortization period, as well as the loan period.
  • The down payment is usually between 25 â 35 percent.
  • The interest rate is usually lower .Banks typically will refinance when the tenant renews the lease. However, the interest rate might change at this time and be higher than the average five to six percent interest rate that is typically granted.

Choosing A Property Type

Before analyzing an investment, the type of property being invested in must be identified. This could range from common property types like residential, commercial or industrial, and office, to less common properties like agricultural or special purpose such as data centers, for example. No matter which property type is chosen, proper investment analysis is key to ensuring its success.

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Determine Your Investment Strategy

If youre like me, you probably have a go-to real estate investing strategy.

Maybe you prefer value-add, long-term hold, or new construction – there are a number of different strategies out there.

But that strategy will need to be tailored to the project.

Once youve reviewed the financials and leases, you may end up having to take a different direction with the property than you had originally anticipated.

After determining your investment strategy, youll have a better idea of renovation needs.

Construction and renovation could be your biggest expense, other than acquisition.

Getting these numbers right is crucial to your success.

And if you dont get the numbers right on the front end prior to purchasing the building, you may not have a large enough loan to cover these costs and finish the job.

So, once youve figured out your strategy, put your construction budget together.

If youve handled renovations before, you may be able to throw together a quick back-of-napkin number.

Of course, you would be wise to have a contractor come out to put together an actual bid for you. Your lender will likely want to review these numbers, so it will help you with your acquisition.

Total Return On Investment

How To Analyze a Commercial Real Estate Market [What To Look For]

The total return on investmentis the true, dollar-for-dollar return on the investors money over the investment horizon. Adding up all the propertys income, subtracting out all of the expenses and debt service and then dividing by the initial equity in the property will tell what percentage return can be expected. This calculation is similar to IRR, though does not account for the time value of money.

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Is It An Opportunity

Determining whether a commercial real estate deal is right for you depends on many factors. For instance, an investor who is close to retirement may have a more conservative mindset and therefore, would prefer to invest in Class A deals of any property type. Meanwhile, a younger or more agile investor may be willing to take on more risk, and therefore, may be drawn to value-add redevelopment opportunities. An opportunity that may not work for one person might conversely be a great opportunity for many others it truly depends on the individual investor, their objectives, and their investment horizon.

Each investor should understand their own investment objectives prior to approaching commercial real estate in any meaningful way. The industry is incredibly diverse, with many property types and classifications. Trying to navigate it without understanding your own objectives could leave you spinning in all of the wrong directions. Instead, outline your goals in advance and then use the tools described today to determine whether a specific deal means those goals.

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Average Income & Spending Power

Before deploying capital in a new market, you must ensure that tenants can generate revenue to pay rent. If the median salary doesnt support a new multifamily development, for example, then investing in one might not make sense. Conducting a commercial real estate market analysis can help your firm to understand whether or not local income supports your investment thesis.

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Getting Started With Real Estate Market Analysis

Kimberly Goodwin, Ph.D.

A detailed market analysis is key to any real estate investment decision. Even though the financial projections have far more impact in management and investment decisions, market analysis is behind each and every number in the financial statements. So, it is important to take the time to gather the data required to fully understand the subject propertys market area. In the end, the quality of the market analysis can make a difference in accurately determining whether or not a property is a feasible, profitable investment.

New Features In Version 15

Investment Analysis: Commercial Real Estate
  • Presentation Brand your reports with your company logo or personal photo. Add property photos to your presentations with just a click.
  • Globalization Choose Canadian-style loan calcs, international currency symbols and metric measures
  • Analysis Use our new alert feature to warn you of potential bad karma in your deal for example, inadequate debt coverage.

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Commercial Real Estate Investing For Beginners

Run by online education marketplace Udemy, this course covers the basics of investing in real estate. Whats more, its run by author Peter Harris, who wrote Commercial Real Estate Investing for Dummies. According to the course prospectus, youll learn:

  • How to own your first CRE property
  • The different asset classes, including which classes individual investors target and why
  • How to evaluate a deal like a pro
  • Major pitfalls to avoid when investing in CRE
  • Tips for specific property types
  • Secrets to building wealth

Where To Find The Data

There are a number of places to find the data necessary for the investment analysis, most of which are readily accessible.

For the propertys basic details like size and year built, the seller can typically be relied upon to provide accurate information. The countys property records can also be referenced for confirmation, and investors may also be well served to request floor plans and blueprints of the property depending on the type of transaction.

Information related to the propertys condition, maintenance issues and renovation requirements can be found by having the property inspected. The inspection team will look at the propertys physical condition in much greater detail than a typical investor would, even going so far as to look at the buildings electrical, HVAC and water systems. Inspections are an upfront cost but are well worth the expense since they can help avoid an unexpected renovation or repair bill later on.

The investor can also talk with the buildings property management company if one is being used, as it will know the details related to the day-to-day operation of the building. The property manager should have detailed records related to the propertys income, expenses and tenants that you can request. The investor should also confirm the property management companys fee and begin thinking about whether the existing management company will be retained or if a new manager is needed.

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How To Carry Out Your Cre Analysis In Quarantine

Amidst the outbreak of coronavirus, commercial brokerages and investors are staring at some very, very murky waters.

Much of the nation is stuck working at home, in-person meetings are gone, and property owners are reluctant to make any immediate business decisions.

With such great levels of unknown, new deals and opportunities are flat out difficult to spot, and even more difficult to close.

What theyre left with is new downtime and a lot of unanswered questions.

This is why we believe that right now is to hone your commercial real estate analysis processes. You can use the additional downtime you might otherwise spend calling owners to conduct more thorough, nuanced, analysis and gather the data needed to make decisions in a highly questionable market.

Below, well look at the different areas of commercial real estate analysis, including the metrics you need to be looking at right now and the resources needed to do so during quarantine.

Ways To Augment Your Existing Commercial Real Estate Pipeline Process

Investment Analysis for Commercial Real Estate (an Introduction to NPV & IRR)

After analyzing several commercial real estate markets and determining your firms focus, the next challenge becomes screening enough deals to identify the most profitable opportunities. Before gaining the bandwidth and building efficiencies to scale deal flow, though, your firm needs the right infrastructure to invest with speed and precision. Once they started managing deals in Dealpath, one of the top 20 investment managers reviewed 194% more deals.

Download our white paper, 7 Ways to Augment Your Existing Commercial Real Estate Pipeline Process, to learn how your firm can achieve the same speed, scale and efficiency.

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Assess General Market Trends

Someone whos looking to invest in commercial real estate might learn about a deal in a few different ways. One way is to scour the market and identify deals on your own, something most first-time investors find challenging. Another way is to express interest in investing, and then look for partners who can bring you deals for consideration.

In either case, the first step when evaluating a prospective deal is to consider the general market trends. At a very high level, an investor will want to understand where we are in the market cycle. Market cycles generally last +/- ten years. It can be risky to invest at the market peak, but trying to pin down the market peak can be a fools errand. Few can predict when the market will turn with any real certainty. Instead, use as a rough guide when making investment decisions.

Where we are in any given market cycle will affect all commercial real estate, regardless of specific location.

Therefore, a more useful barometer when analyzing a commercial real estate deal is the hyper-local market trends. For example, lets say a fund manager is looking for you to invest in a submarket of Houston, Texas. Youll want to learn more about the drivers of that submarket. Ask questions like:

Now start to investigate questions that pertain specifically to the property class in question:

How To Analyze A Real Estate Investment

Real estate is the world’s largest asset class, and for good reason: Its both capital-intensive and relatively accessible. According to Savills World Research, the value of global real estate reached an estimated $280.6 trillion at the end of 2017, making up more than 77 percent of the worlds wealth.

Real estate is often the primary source of wealth for individuals and the biggest investment many make in their lives. Consider the building youre in right now. It may be owned by a company or person to whom you or a business pays rent. It could be your home that you own or pay a mortgage on, or a hotel youre paying to stay at.

Because of its accessibility and history of high returns, real estate is an incredibly popular alternative investment option for individuals. But how can you get involved in real estate, and how do you know if a property is a wise investment decision?

To succeed as a real estate investor, you need to understand the four key factors to consider when analyzing a potential investment. Before diving into these factors, heres a primer on the five types of real estate and how to invest.

Access your free e-book today.

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Commercial Real Estate Market Analysis In Practice

Heres an example of how you can find market information and use it to check your assumptions in a financial model for a real estate deal, taken from the office development case study in our Real Estate Financial Modeling Course.

This deal corresponds to 100 Bishopsgate, a 36-story office development in London.

Many assumptions go into this model, including the land price per square meter, the construction costs, the number of tenants and their lease types, the annual change in office rents in London, the annual rental escalations, and the expense growth rate.

Then there are also concessions for the tenants, such as a certain number of free months of rent, and tenant improvements, which give the tenants money to customize their space.

I found all the reports required for this real estate market analysis with simple Google searches for terms like London office market rent trends and London office prime yield.

You can get two of the reports, with the key sections highlighted, below:

Determining The Value Of The Real Estate Investment

Commercial Real Estate Analysis And Investments 3rd Edition

Regardless of the type of property being invested in, the primary objective of any pre-investment process is to have a good understanding of its value to ensure any proposed business plan will deliver targeted returns. There is a much higher probability that an investor will inadvertently overpay for a property without the proper analysis than there is that they will underpay and, as is often said in commercial real estate, the money is always made when an asset is bought, not when it is sold.

To determine the value of the real estate investment, one of two methods are commonly used: comp analysis and income analysis.

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Fundamental #: Understand The Role Of Property Management For Commercial Buildings

The role of property management in commercial real estate is a bit different than residential property management. A commercial property manager will have different responsibilities, depending on the type of property. For example, an owner will usually not have a property manager for triple net leases.

Additionally, how much is expected out of a property manager, will greatly influence the rate they are paid. If the owner takes a completely hands-off or passive approach, then the cost of property management will be higher.

How To Conduct Real Estate Market Analysis

In real life, youll do a combination of online research and offline work to analyze the market.

Major components of this analysis might include:

  • Comparable Property Sales What have similar properties in the area sold for on a per-unit and per-square-foot basis in the past few years? What about the Cap Rates?
  • Comparable Properties What are the average rents at similar nearby properties? What about the occupancy rates and concessions given to tenants?
  • Historical Rent, Expense, and Other Trends How have rents changed over the past 5-10 years? What about expenses, such as property taxes and maintenance? How have Cap Rates changed over the past few cycles?
  • Lease Terms and Renewal Probabilities Whats the average term of a lease? How many free months of rent do tenants receive? On average, what percentage of tenants renew their leases upon expiration?
  • Absorption Data What is the total amount of space that becomes occupied in a given period, minus the amount that becomes vacant? How many new units, properties, or square feet are constructed each year, and how many are leased out?
  • Demographic Trends Is the population in the area rising or falling? Whats the average family income, and what is the unemployment rate? Is the population relatively young, or is it aging rapidly?
  • In-Person Assessment of Property and Neighborhood There are some things you can only figure out in-person.

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