Five Steps to a Successful Commercial Property Selection

Of course, commercial property selection is a broad topic due to the varied nature of “commercial” properties.  However, the majority of investors are considering retail space or office space for investment.  Let’s look at an overview of five factors that apply to both retail and office space commercial property selection for long term ROI.

#1 Your Investment Goals

Of course, Return On Investment is always the primary goal.  However, there are other considerations before a substantial investment involving commercial property selection.  Are you seeking a passive role, active management participation, or something in between?  Commercial properties require a great deal more management and sales/marketing activity.  If you do not wish to be involved, you’ll take a different approach to commercial property selection and your role.

Perhaps you’ll join others in a partnership, with some partners only involved monetarily and others also taking a management and marketing role.  If you want to be hands-on, your commercial property selection could be a smaller office complex that will not require as much of your time.  Before setting out to research properties, have your target price range, investment objectives, and involvement level figured out.

#2 The Local Economy – Business and Consumer

This is an interesting factor in commercial property selection because you may not want to rely solely on your business clients’ economic research and outlook.  Suppose they’re haphazard about tracking their customer base and demand.  Or maybe they’re not very diligent in other areas of market research that could create stress in their business in the near future.

You want to do two levels of research, business and consumer.  Let’s use a small retail strip center as an example.  It’s been a good investment for the current owner, but they’re retiring and want to leave the area.  It has five units, currently a nail salon, barber shop, small organic grocery, to-go barbecue place, and a payday loan business.  They have been fairly stable tenants and rents are mostly at market rates.

However, what’s going on in the local economy?  They’re in place and likely just struggling to maintain sales, not necessarily checking the economy to see if leaving is the right alternative.  Either way, you lose a tenant to bankruptcy or they move to go where the customers are.  Your job in commercial property selection in this case is to not only check their current business health, but also the consumers in the area.  Are they moving away, or is the area growing?  Are major employers relocating?  Will the current demand for these services remain viable for your ownership period?  Are wages dropping such that nail salons and gourmet organic products will be priced out of range for the new consumers?

#3 Physical Location

This is really important, as traffic for retail is crucial, and even office complexes must be relatively easy to access and not too far out of the areas where the customers live.  Just travel the old Route 66 to see what happens to businesses when a new freeway moves the traffic away.  It’s usually not that dramatic, but our example retail strip center could be in big trouble if the previously busy street is modified such that it’s harder to access.  Or perhaps a nearby parallel street is widened so traffic moves to the faster route.

#4 Age & Condition

This is more than just how old the building is and if it is in need of work.  That grocery store could have a walk-in cooler and other equipment that’s reached the end of its useful life.  Keeping it repaired or buying new are both expensive projects to be considered.  How about the roof, heating and cooling, and parking lot conditions?  Even if acceptable condition-wise, a lower offering price may be the best approach.  Are there conditions that may be the target of code enforcement, such as handicap access, etc. that could be expensive to remedy?

#5 Are the Numbers Real Numbers?

You’re going to be checking out leases very carefully.  Sometimes landlords allow tenants to work off lease payments, and the cash flow isn’t really as the lease sets out.  Don’t just check the leases, check the deposits against them.  Are some of the units under-leased or the opposite?  Sometimes a poor negotiator as a tenant will overpay for their space, but when they figure it out they leave and the next one isn’t so gullible.

These are broad considerations, but if you take these steps in Raleigh area commercial property selection you’ll probably be happy with the result for years to come.

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