Why Buy Commercial Real Estate? Deep Dive Into 6 Sought-After Property Types!
When it comes to buying commercial real estate for sale – both across the US and here in Columbus, Ohio – the diversity of enterprises and sheer size of the industry can be staggering. In fact, according to the US Energy Information Administration, there are an estimated 5.9 million commercial buildings in the US for a total of 97 billion square feet. By comparison, an Olympic-sized pool contains 13,455 square feet. To match the girth of American commercial real estate, it would take 7.2 million pools to fit it all in.
Buying Commercial Real Estate for Sale Is Not One-Size-Fits-All
For commercial real estate companies and investors, looking at wide-ranging commercial property sectors, doing so can be an overwhelming (not to mention stressful and time-consuming) experience. Knowing what pitfalls to avoid and what opportunities to grab hold of are critical. Not only in the current economic moment but whenever you or your company decide to make the deep dive.
To be sure, there are many factors to consider when leaping into the proverbial deep end of the pool of commercial real estate listings. There are questions pertinent to each sub-sector that requires an answer; or at the very least, a range of answers from which to make an informed decision. There are also broader questions that apply to all industries. What follows is a macro and micro breakdown of how best to proceed.
How To Find Commercial Real Estate Properties: Knowing Your Swim Lane
Unlike residential property, the metrics for how to find commercial real estate and to evaluate commercial investment properties are varied. While residential property value is primarily determined based on the going sale price of a similar property located in the same or similar community, commercial property relies most heavily on what’s known as the capitalization rate. To determine the capitalization rate, a commercial real estate firm should divide the property’s sale price by its net operating income or NOI. NOI is a figure – not a calculation – that is, the amount of income the asset yields after operating expenses (including vacancy and loss) and before the mortgage is paid.
Additional metrics include:
- cash flow (the amount of money left over after all expenses and mortgage are paid);
- cash-on-cash return, which is defined by Investopedia as the “annual return the investor made on the property in relation to the amount of mortgage paid during the same year;”
- and gross income, which is simply the amount of money a property yields before expenses.
Beyond the cold, hard numbers, there are also some basic ground rule questions for even the best commercial real estate company to consider:
- Can you secure financing? This is not a shoo-in. It may be even harder to secure the funds for a commercial property for sale in Columbus, Ohio than a residential buy. The bank will be doing its due diligence when it comes to determining value too. If it seems as if you’re over-leveraged you won’t get the loan.
- Do you have a paper trail? If you plan to buy commercial real estate in Ohio or beyond, you must have access to a roster of current tenants, service contracts, and maintenance records. Income and expense statements also help you gain knowledge about the property you’re looking to buy. The earlier you receive this documentation, the better it can help you prepare for future challenges (like nonpayment) and begin an early outreach process.
- What’s your financial cushion? This question is probably similar to residential real estate. How much you can afford is also based on how much you have in the bank and not just your income. Big buildings with the help of a commercial real estate broker are nonetheless big purchases. But there’s also potential money lost during the transition period in the form of vacancies and defaults. Combined, these factors could eat up 10 percent of your expected income or more. Plan for this and have at least that much liquidity to absorb any early purchase challenges.
Off to the Deep End – Industrial Property Insights
“She may not look like much, but she’s got it where it counts.” Those were the reassuring words Han Solo (Harrison Ford) delivered to Luke Skywalker (Mark Hamill) early in the Star Wars trilogy. As you may remember, the young Jedi-to-be is seen inspecting with dismay his recently chartered flight, the Millennium Falcon, for a speedy trip to the planet Alderaan.
Despite their sometimes-forlorn locations and sometimes-rundown appearance, industrial properties, like the beat-up fictional hyperspace cruiser, also have it where it counts. Often, a wise industrial property purchase for Columbus Ohio commercial real estate for sale can yield higher (sometimes much higher) investment returns than other properties.
While industrial properties can be subdivided into eight narrower categories, this article will focus on the standard variables you will want to know when buying in any submarkets. For instance, the top commercial real estate firms can show you a range from warehouses and heavy manufacturing to data storage centers and showroom buildings. So, consider these tips when evaluating your industrial property or commercial real estate for lease.
- Planes, Trains, Automobiles, and More: Transportation links are essential for any industrial space or commercial properties for lease. Your commercial real estate agency cannot underscore the importance of manufacturing and e-commerce businesses in particular. Ideally, you want your property to be at or very near an intermodal transit point where planes, trains, trucks, and seagoing vessels easily interchange. Not only that, but you want those transit links to be modern, well funded, and in high use. Otherwise, the proximity to these transit connections would be useless.
- Location, Location, Location: Location is related to the above. When owning an industrial building, it helps if you’re within a certain distance of the labor required to run the business. Increasingly, potential workers will avoid areas that are derelict or environmental hazards. Opt to buy an industrial property that demonstrates its corporate citizenship and publicizes those efforts regularly. It’s also best to avoid industrial sites with longstanding environmental violations or are currently dealing with leaking toxins like PCBs or asbestos. The cleanup cost of your industrial real estate can run high and take years to complete.
- Be Square and Be There: While being “square” in a social context is used to describe someone boring or dull, industrial spaces work better when they’re rectangular. That’s because it’s a design most adaptable to various uses and future expansion as business needs evolve. Height is essential, too, as vertical space adds to the storage ability of your industrial real estate property.
- Sweet Deals Sell Fast: Increasingly, would-be industrial property buyers find that municipalities are looking to incentivize certain businesses while de-incentivizing others. Incentives could include tax breaks, low-cost loans, and even free land on which to build. Do your research and see what sweet deals might offset other pain points.
Finally, to round out the above, it helps to know a thing or two about the industrial facility’s parking lot situation (Is it well maintained? Is it a covered garage? Is it shared with the town or city?), as well as its security and climate control/HVAC needs. Again, the better and newer these items are at purchase, the less will be spent later on when something fails or breaks or is found to be in noncompliance with a local ordinance. Combined with the peace of mind, such detective work engenders, and all of a sudden, an industrial real estate property deemed “too costly,” could suddenly look like a long-term steal.
Swimming in Success: Restaurant and Retail Rental Space
Of all the subtypes of commercial real estate Ohio has to offer, restaurant and retail rental space are perhaps the most “fun.” Why? Because you, as the owner, are looking to create something – or build someone else’s dream further. Shops and restaurants are people-friendly. And if you do it right, such establishments can become community staples and perhaps, even national chains.
While there is some overlap with industrial property insights, namely expandability and the assurance that all assets are in perfect working condition before purchase, there are noteworthy distinctions.
Easy access and diverse demographics – Let’s face it; no one wants to eat at a standalone restaurant set back in a largely vacant lot or in an unlit part of town where foot traffic is low. No. When choosing the restaurant or retail space available of your dreams, you must be in a lively location with a mix of people and age groups. Ideally, you want to be in the center of town, near a variety of business establishments. Being in a central location is true for both retail space and restaurants, as a business in one often cross-pollinates business elsewhere.
Affordability Matters – Like with industrial space, the question “Can I afford this?” should be ringing in your head at all times. For restaurant operators and storefront owners, the streetwise recommendation is to pay no more than 6% to 8% of their sales in rent. Granted, this could be a challenge in the priciest of markets in the largest cities. Upkeep and maintenance alone can be a considerable expense. Remember to think conservative. For a restaurant or retail investor just starting out, smaller, more affordable cities or even food trucks may be an easier first rung on the ladder to reach.
Know Your Soft Assets – For the restaurant and retail rental space, soft assets concern the establishment’s popularity, online reviews, engagement with the community, among other intangibles. Often when a business is changing hands, it will be essential to preserve and continue cultivating that perception if the goodwill is exceptionally favorable. Sometimes, however, the reverse is true, and an existing storefront or eatery is in a prime location, but it never managed to catch on. Knowing the history and background of the commercial real estate for sale will help determine the amount of marketing and promotional spend required to change course and alter mindsets.
Lease Peace – Negotiating your restaurant or retail commercial properties for lease is a little different than a simple apartment rental agreement. Minimum base terms should be no less than 5-10 years, and annual increases should be clearly delineated. Failure to map this out in advance as much as possible means that even with growing revenue, rent payments could outstrip your ability to pay.
Multifamily Units, Multiple Fish in the Sea
Regardless of which sectors you consider your commercial real estate investment, it’s crucial to take stock of the housing market at large, as the macro trends will help dictate your ability to afford and gauge the mood of potential tenants. The good news here is that the news is, well – good. Low mortgage rates and an inventory crunch (limited supply) fuel the US housing market fire. As such, multifamily properties are an opportunity to capitalize on the current market.
Compared to their single-family cousins, any commercial brokerage will tell you that multifamily units offer a variety of benefits when it comes to purchasing commercial real estate Ohio has to offer. Chief among them include:
- Cash Flow to (Potential) Cash Flood: It’s a bit of common sense, but it bears emphasis. Commercial investment properties, such as multifamily real estate properties, generate income from multiple families versus only a single source of income for a detached home. This means more revenue generation from a single commercial property. It’s also an idea for investors looking to live in one unit and rent the other as passive income. For retirees interested in investing, this could be a brilliant (and even fun) way to go.
- A Low-risk Valuable Proposition: Again, simple math. A property generating more revenue will be valued higher. And multifamily homes achieve just that. Also, multifamily homes make sense from a risk mitigation standpoint. A single vacancy (even several) isn’t enough to derail at least some income generation from other tenants versus an empty single-family home.
- Portfolio Growth Potential: Multifamily investments are highly scalable ventures, allowing investors, or even an opportunistic commercial realtor, to purchase multiple properties in a single building. Often, multifamily units are close to other commercial investment properties, leading to mixed-use and apartment purchases in the future. Multifamily units are an excellent way to get one’s feet wet without jumping into the pool.
- Outsourced Property Management: If the stress and hassle of managing a property feel too overwhelming, multifamily units are just large enough to entice a property manager to take over that responsibility. You may be able to inquire with your commercial real estate agent or firm because they may offer property management services under their umbrella. And, yes, such a service requires payment; however, the ease and peace of mind often make up for the lost income.
- Tax Breaks: Multifamily properties often offer sizable tax benefits for investors. With tax incentives, investors can reduce their multifamily commercial property value to offset a portion of the rental income collected from the property annually.
- Less Onerous Insurance Policies: While it’s valid that multifamily properties have more to insure, often, these policies are easier to read and manage. Insurance companies know these properties well and are ready to help navigate any communication stumbling blocks. As your portfolio grows, you’ll be able to group everything under one policy, not dissimilar to a family owning multiple cars.
Bottom line: it all comes down to simple math, a little homework, and a gut feeling in the end. If the ROI comfortably offsets the amount paid for the multifamily units, then you’re in good shape. If the neighborhood is growing and diversifying, then that’s another check-plus.
Fishing For ROI: The Reality (of) Office Investing
Of the various commercial real estate investment properties to consider, there’s no denying that office space can be the most challenging, chiefly for its historical volatility – and more recently, the continued fallout from COVID-19. Regarding COVID-19, US office vacancy rates have increased from 9 percent in the fourth quarter of 2019 to 17.2 percent in the second quarter of 2021. And yes, it’s some of the highest vacancy rates seen in decades.
Also, compared to the other properties, office space investors must confront: high fixed costs, significant capital costs (new leases and building upgrade/maintenance), suppressed market rent advantage due to long-term leases with fixed increases, a time-consuming disposition process, and the ever-present challenge of timing your purchase at the right moment when property values are highest, and, ideally, when you know your most valuable leases don’t expire for years.
But none of this should be a final detractor. In fact, with the high likelihood that much of the country’s office property will rebound once the pandemic ends, now might be a great investment opportunity as prices are lower.
There are two highly effective steps when uncovering how to find commercial real estate and evaluating space according to ROI (the reality of office investing):
Step 1: Conduct what’s known as a “desktop analysis”:
Performed from the comfort of your home (read: remote), start researching and collecting as much data as you can about the property. Some items to consider:
- the vacancy rates
- the absorption rate (the amount of space leased/vacated over time)
- new construction pipeline of nearby buildings
- average office rental rate
- general economic trends in the community (e.g., employment rate)
Also, take the time to research the available sublease space that not yet publicly known. Often, subleases go unaccounted for, and the amount of space within the commercial real estate for lease is greater than your estimates. Lastly, while office space is known for its volatility, some markets are more stable than others. Thus, it’s essential to know the current vacancy rate, and how it’s changed over time, and what the trend lines look like going forward.
Step 2: Perform a field evaluation of the commercial property:
The next step is to make a little “home visit” and see what you’re getting yourself into. This is where you get a chance to see a “day in the life” of the property and possibly interact with existing tenants. Here, it helps to leave no stone unturned. Note the HVAC system. Is it in perfect working order? If not, what’s the cost of the upgrade? How’s the IT infrastructure, and how well enabled is the building from a technology perspective to handle remote work and hybrid work/home flexibility? Observe the façade and roof closely and consider paying for an inspection; just because something looks well maintained doesn’t mean it is.
Also, it helps to review environmental assessments. Are there any outstanding issues you should be aware of? Likewise, how are the fire suppression system and lighting systems? Are they up to code? Are they in working order?
Lastly, perform a parking lot check and note the parking ratios of employees’ spots as well as their proximity to other forms of transportation. With a more flexible workforce and fewer employees on-site at any given time, these variables may be less critical today.
Landlubber’s Delight: Land on the Right Land for Sale
The final type of commercial real estate investment concerns the land itself – undeveloped land. That is, ground that has not been developed before it could be adapted to several real estate development types.
The chief benefits of buying land are that it is often low cost, features a good ROI, has little maintenance costs, and offers an excellent opportunity to start something big. Remember, too, that new land isn’t being made (except for artificial islands and volcanoes depositing new materials as in the case of Hawaii), and population rise continues. Thus, land, good land, will always be in high demand.
Once you have acquired the land in question, you have several options in how you invest in commercial real estate in Ohio. You can:
- buy it to flip it;
- develop raw land;
- purchase land and hold it for the long term;
- buy and lease out the land; or
- buy land and sell it with owner financing.
Owner financing, according to Millionacres, a service of Motley Fool, “Owner financing is when the seller of the property carries financing for the buyer, essentially standing in for a bank. The buyer provides a down payment and repays the seller of the property the remaining balance of the loan according to specific terms. The property buyer is responsible for the land development and maintenance of the land, including paying taxes.”
To be sure, not all raw land is created equal. Well, “created” might not be accurate – “utilized” by humans is probably a better choice of words.
As one might expect, environmental variables are deterministic in commercial property valuation. A fundamental question to be asked: can the land be developed as you intend? This could relate to soil quality, drainage, type of bedrock, etc. (Sometimes, a land feasibility study may be the right decision before you invest.)
You will also want to know the property’s zoning, as well as the land’s current value. Determining its potential future value could be difficult. Still, a broad estimate is possible, and it begins with how you intend to use the space and the degree of demand for that type of commercial property.
Additionally, find out the following information about your property:
- Annual taxes
- Whether or not there is public access to the property or if access rights are required through an adjacent piece of land
- Utility status – whether water, electricity, gas, septic, and sewer systems already exist, or will need to be added
- Local zoning laws and whether there are any restrictions on development
- Potential regulations for the area based on local zoning laws
Ready to Buy Commercial Real Estate? Our Final Thoughts and Considerations:
Our current global moment notwithstanding, now is an excellent time to jump in the proverbial pool as the US and the world economy rebound. When it comes to commercial real estate in Columbus, Ohio, our region is gaining a reputation for its youthful dynamism and robust growth in the logistics, professional services, retail, and digital sectors; all of which buoys the residential and commercial real estate investment market.
While we won’t claim clairvoyance, we can only say that this too shall pass if the past is any guide. And as a social species that craves human connection, brick-and-mortar establishments, such as offices and storefronts will remain vibrant. Populations will continue to grow, and consumers will continue to consume.
If anything, the current unique situation we collectively find ourselves in might yield unprecedented opportunities. So, what are you waiting for!? Jump into the incredible market of commercial real estate Columbus, Ohio has to offer.
As is often the case in life, getting started is usually the most challenging part. Fortunately, today average Americans can pursue many avenues in researching the commercial real estate for lease or land of their dreams. There are, of course, commercial real estate listings platforms; however, don’t you want a human with their nose to the ground, taking the proverbial pulse of the people – and the neighborhood?
At the Robert Weiler Company, a full-service commercial real estate and appraisal firm with over 80 years in the business, we know and appreciate the nuances involved in making these potentially life-changing decisions. As a company rooted in tradition, dedicated to trust and expertise, and founded in a simpler, less chaotic time, we believe those 1938 values of personal engagement and personal connection are more important than ever – even as technology helps augment our skills.
Backed by an incredible team of professionals in a vast array of commercial real estate services, The Robert Weiler Company is an essential resource when it comes to finding the best deals and properly evaluating the ideal properties, especially in medium-sized markets like Columbus, Ohio.
The Robert Weiler Company is ready to partner with you on your next commercial real estate investment. Get in touch with us at 614-221-4286.