Buying Commercial Rental Property | Leasing Renting

Commercial real estate is a generic term that includes properties used for office, retail, and industrial purposes. You can also include self-storage and hospitality (hotels and motels) properties in this category. If you?re a knowledgeable real estate investor and you like a challenge, you need to know two good reasons to invest in commercial real estate:

You can use some of the space if you own your own small business. Just as it?s generally more cost-effective to own your home rather than rent over the years, so it is with commercial real estate if ? and this is a big if ? you buy at a reasonably good time and hold the property for many years.

Your analysis of your local market suggests that it?s a good time to buy. We discuss more on this point in a moment.

We want to be clear, though, that commercial real estate isn?t our first recommendation, especially for inexperienced investors. Residential real estate is generally far easier to understand and also usually carries lower investment and tenant risks.

With commercial real estate, when tenants move out, new tenants nearly always require extensive and costly improvements to customize the space

to meet their planned usage of the property. And you usually have to pay for the majority of the associated costs in order to compete with other building owners. Fortunes can quickly change ? small companies can go under, get too big for a space, and so on. Change is the order of the day in the business world, and especially in the small business world.

So how do you evaluate the state of your local commercial real estate market? You must check out, over a number of years, the supply and demand statistics. How much total space (and new space) is available for rent, and how has that changed in recent years? What?s the vacancy rate, and how has that changed over time? Also, examine the rental rates, usually quoted as a price per square foot.

One danger sign that purchasing a commercial property in an area is likely to produce disappointing investment returns is a market where the supply of available space has increased faster than demand, leading to higher vacancies and falling rental rates. (This is called negative absorption, and what you

naturally want is a track record and projections showing positive absorption ? when the supply of space isn?t keeping up with the demand.) A slowing local economy and a higher unemployment rate also spell trouble for commercial real estate prices. Each market is different, so make sure you check out the details of your area.

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