From Industrial to Retail: A Deep Dive into Evaluating Commercial Real Estate
When it comes to commercial real estate – 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.
Commercial Real Estate 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: 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? When buying 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 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 to 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 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 your storage ability.
- 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 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, a property deemed “too costly,” could all of a sudden 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 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 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.
Coming Up for Air – Thoughts and Considerations For Your Next Commercial Real Estate Buy
As you can see, while commercial real estate shares some broad parameters when it comes to a potential purchase, there are distinct differences between the groups.
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. Our current global moment notwithstanding, now is an excellent time to jump in the proverbial pool as the US and the world economy rebound.
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 will remain vibrant. Industrial space, too. 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.
Backed by an incredible team of professionals in a vast array of commercial real estate services, The Robert Weiler Company is ready to partner on your next commercial real estate investment. Get in touch with us at 614-221-4286.