Whether you’re a broker or an investor, commercial real estate offers lucrative opportunities. But this sector’s unique challenges require specialized training and knowledge.
Commercial properties include office buildings, warehouses, retail spaces and hotels. Returns can be higher than residential investments, but risks are greater during economic downturns. Investors can invest in commercial properties directly or indirectly through REITs, ETFs and crowdfunding. Contact Las Vegas Commercial Real Estate now!
Office buildings are workspaces used by businesses to conduct their operations. They can range from massive urban skyscrapers to suburban office parks containing multiple buildings. Unlike other types of commercial real estate, offices are typically leased rather than owned by the tenants. In other words, an investor buys the property and rents it to a business. This allows the investor to collect a regular income stream from each tenant, and also gives tenants flexibility when it comes to choosing the best space for their company.
Office properties are usually categorized into three classes. Class A buildings are the top-of-the-line spaces and offer the most modern features. Typically located in high-demand areas of cities, these properties may boast rooftop courtyards, state-of-the-art infrastructure and an architecturally distinct design. Class B office buildings are well-maintained but don’t offer the luxury amenities of a Class A building. Class C buildings are less well-maintained and lack the amenities of a Class A or Class B building.
The location of an office building is another important factor to consider. High-rise structures are most common in central business districts (CBDs), while suburban locations generally host low-rise office buildings. Some cities have even grouped their midrise office buildings into office parks that feature multiple buildings in a campus-like setting.
It’s important to monitor the vacancy rate and lease expiration rates of office buildings you’re interested in investing in. Vacancy and lease expiration rates can change quickly, depending on the economy and employment growth. It’s also important to watch the real estate cycle, as it relates to office space, since it can be difficult to repurpose a large space for a new use when the original tenant leaves.
Warehouses
Traditionally considered a step-sister of commercial real estate’s more popular cousins, offices and retail space, warehouses have been making a comeback in recent years as the sector’s darling. E-fulfillment, the need for larger distribution centers and the growth of tech firms that operate data centers are all driving increased demand for warehouse properties. In fact, industrial space is so hot right now that Blackstone paid a big premium this month to take over a warehouse REIT in the UK.
There are many different types of warehouses, but the most common is a general warehouse that stores goods before they are distributed or shipped. These buildings can be one or more stories, with some having small office spaces and showrooms. Other types of warehouses include cold storage facilities, which are equipped with freezers to store perishable goods. Then there are light assembly warehouses, which are not as heavily customized but still house machinery for manufacturing or product assembly. And finally, there are flex warehouses, which combine multiple uses and may have both office and warehouse space.
Regardless of the type, warehouse property prices are typically quoted in terms of rent per square foot, just as commercial office and retail space is. This is why it’s crucial for investors to get an accurate measurement of a building’s size, as well as to gather information about what kind of goods will be stored there.
Once you have that info, Westwood Net Lease Advisors recommends you compare a property to similar warehouse properties in the area or city. Also, be sure to find out about any specialized equipment the property may have. This can impact a property’s value and its potential cash-on-cash returns.
Retail Space
Retail space is leased to businesses that sell goods and services directly to consumers through a storefront. This can range from a small boutique clothier to a large high-end restaurant. Retail space can be found in shopping centers, strip malls, and even in standalone buildings. Retail space can also be found in mixed-use buildings with residential units or offices on the upper floors.
Retail spaces are often located near larger, more popular stores, known as anchor businesses. These larger stores draw foot traffic and shoppers into the surrounding area, which can help drive customers to smaller stores as well. Retail spaces are designed to optimize the flow of shoppers, with plenty of aisles and eye-catching fixtures to grab customer attention.
Compared to other commercial real estate types, retail properties tend to have shorter lease terms, ranging from 5-10 years. This is because retailers must strike a balance between maximizing profits and maintaining a positive brand image. For example, a retailer can lose customers and revenue if it operates out of an unappetizing storefront or offers subpar products.
As with other types of commercial real estate, finding retail space that fits your business requires market research and networking within the industry. Attending real estate investment conferences, exploring online listings, and partnering with experienced professionals can help you identify potential opportunities. Once you’ve found a promising property, conducting thorough property inspections and financial analyses is crucial to making a sound investment decision. You may also want to consider negotiating a Tenant Improvement Allowance (TIA) with the landlord to offset some of your build-out costs. This could include the cost of new furnishings, shelving, merchandising displays, and other necessities.
Multifamily Apartments
Multifamily apartments are another important component of commercial real estate. These buildings are generally smaller than office buildings and include apartment units, townhomes and condos. They can be grouped into larger residential communities with shared amenities like pools, workout rooms and parking garages. They are often located near a city center, with access to transit and jobs.
When you’re considering investing in commercial real estate, pay special attention to the number of units the property has. This will impact your ability to find tenants and the amount of rent you can charge. It’s also wise to research the area where the property is located. A desirable location can attract more renters, increasing your odds of finding long-term tenants.
Any building with more than four apartments is considered a multifamily property. These types of properties can be owned or leased, which makes them suitable for both single-family and investment purposes. Duplexes, triplexes and quadplexes are common forms of multifamily housing. These are generally low-rise structures, with fewer than four units, and often found in suburban areas.
While many people prefer to live in a single-family home, multifamily homes can be a great option for those who are looking to move out of the suburbs and into urban centers. They’re usually more affordable than single-family homes and may offer subsidized apartments for low-income families.
When shopping for a multifamily property, it’s important to look at the history of the property’s tenants and maintenance. This will help you gauge how well the property has been managed and whether it is worth the price tag. You should also consider the current zoning laws and any other regulations that affect the property, such as labor laws or building codes.
Hotels
Hotels are a diverse and vibrant sector of commercial real estate. They provide memorable experiences to guests, and their operations require complex processes and compliance with industry standards. Legal professionals specializing in hospitality real estate can help protect the interests of hotel and resort property owners while ensuring legal compliance.
Hospitality properties typically yield high returns, but they also face higher risk than other commercial real estate types. This is because the hotel business tends to be seasonal, making room rates and profits more volatile than in other sectors. To mitigate this, some investors focus on a strategy called “property flipping,” which involves purchasing an existing property and renovating it to increase its value before selling it. This approach can lead to quick profits, and it also provides an opportunity for individuals to gain hands-on experience in the sector.
Another benefit of investing in hotels is their adaptability to changing market demands and economic conditions. For example, if a hotel experiences a spike in demand for extended stays, it may add rooms with kitchenettes to accommodate this growing segment of travelers. In addition, some hotel brands are transforming their locations into destinations that offer more than just a place to sleep, such as by adding retail, restaurants and other features to create a sense of community.
Many of these hotel and lodging types can benefit from the application of cost segregation, a tax depreciation strategy that allows for faster deductions for building, furniture, fixtures and equipment (FF&E) than standard property categories. This can allow investors to accelerate depreciation deductions during the early years of ownership, which can significantly boost after-tax cash flow and improve the overall return on investment.