Commercial real estate investments offer a higher income potential than residential properties. They also tend to have longer lease agreements, typically “triple net” ones that make tenants responsible for paying taxes, insurance, and maintenance.
But they come with more risks. That’s why it’s important to understand the pros and cons of these investment opportunities before making an informed decision.
1. Real estate investment trusts
Real estate investment trusts (REITs) are a low-risk way to invest in commercial real estate. REITs buy and bundle properties, which reduces risk because you’re not investing in a single property. However, it’s important to research the REIT’s holdings to ensure they’re well diversified.
Unlike stocks, the commercial real estate market is highly cyclical and can be volatile. Predicting future market trends is difficult, but investors who study up on previous years and understand economic drivers can make educated guesses on how their local markets will perform in 2022 and beyond.
To find the best CRE investments, consider factors like population growth, job creation, and rent growth. Also, pay attention to the intended tenant type and location. For example, a warehouse space would be more suitable in an urban center than a residential neighborhood. It’s also important to remember that the ROI for any investment varies, so conduct your own due diligence and seek advice from a real estate expert. Also, remember that one vacancy in a large commercial building will have a much bigger impact on your bottom line than a single-family home’s vacancy rate.
Investing in self-storage can be an excellent way to diversify your commercial real estate portfolio. This property type is typically less risky than other types of commercial real estate investments, and it offers good returns even during a downturn.
As the demand for self-storage continues to grow, it may be worth looking at opportunities in this sector. This commercial real estate investment is also relatively easy to manage. Self-storage facilities require fewer maintenance costs than other asset classes and typically feature month-to-month leases, making it easier for property managers to respond to market changes.
Americans tend to use self-storage when they are moving into a new home, or after downsizing their furniture. This demand, coupled with strong returns and low operating expenses, makes this commercial property type an attractive investment option for institutions.
As your firm reviews new self-storage investment opportunities, details matter. Having the right data at your fingertips can help expedite evaluations and boost deal velocity. Download Dealpath’s free guide to learn how tracking key metrics like square footage, total units, and climate controlled units can help you surface the most profitable self-storage investment opportunities.
3. Office buildings
Commercial office buildings offer a lot of financial reward for investors. However, they also come with more risks than other commercial property types. This is why it’s important to understand the pros and cons of investing in them before you make your decision.
Some office building projects have been put on hold, but many landlords believe demand will return as the COVID-19 pandemic eases and companies adapt their work space to new public health practices. In 2021, Dallas was ranked as the best city for commercial real estate investment due to its growing economy, robust office job market, and proximity to research and development centers.
As one of the largest commercial landlords in NYC, Silverstein Properties’ portfolio is impressive. Their holdings include iconic buildings like 1177 Avenue of the Americas and 30 Park Place. They also own Wall Street’s 111 and 60 Wall streets, which were both recently refurbished to boast bronze-trimmed glass facades and herringbone travertine floors. The company has an even more extensive reach outside of Manhattan with 33 residential buildings and 16 commercial office buildings in their portfolio.
4. Retail buildings
There’s a reason why almost everyone in the Forbes 400 invests in commercial real estate, and retail buildings offer some of the highest yields. As BiggerPockets notes, retail properties are often a great way to diversify a portfolio because of the many different sources of income they generate from tenants like grocery stores, fashion boutiques, and bike shops.
Additionally, if you invest in a mall or shopping center, you’ll have a variety of retailers that all pay the same rent, so your property will be less dependent on a single tenant’s health (or financial) situation. Lastly, retail investments often require more time commitment than residential properties since they have multiple leases and annual CAM adjustments (the fees tenants are responsible for paying that cover common area maintenance).
There are several types of retail properties, and each one offers a different type of experience for shoppers and investors. In general, lenders prefer retail assets with strong historical performance and long-term NNN leases (the portion of the rent that tenants pay that covers property taxes, insurance and shared expenses) from established national credit tenants.
5. Multifamily buildings
If you’re looking to start investing in commercial real estate, you should consider a multifamily building. These buildings are generally considered to be a good investment because they provide consistent cash flow, lower risk and easier financing. There are many different types of multifamily buildings, including apartments, senior housing, and subsidized housing. You can also find mixed-use buildings, which are often found in suburban areas and include retail stores on the ground floor and residential units above them.
Another great investment option is a shopping mall. This type of property is very lucrative because it attracts a lot of business tenants. Additionally, it’s a relatively low-risk type of property because business tenants tend to have longer lease terms than office or industrial tenants.
It’s important to understand that commercial real estate is a complex industry. Every market has its own unique supply and demand, so it’s crucial to research the performance of each CRE sector in a specific location before choosing the right one for you.