6 Steps to Success in Commercial Real Estate
Buying and owning real estate is an exciting investment strategy that can be both satisfying and, when done astutely, lucrative. The growth in developed and developing areas has increased the demand for more commercial and residential properties; real estate continues to attract capital and demonstrate its enduring appeal as an investment asset class.1
The acquisition of income-producing commercial real estate increased by three per cent to $963.7 billion in 2018, the third highest annual total on record, after 2007 and 2015.2 There’s roughly $6 trillion worth of commercial real estate in the United States alone, worth more than all stocks and bonds combined.3 Defined as “any property owned for the purpose of producing income”, and used exclusively for business or workspace purposes, commercial real estate (CRE) remains an appealing venture opportunity.4 For investors, CRE can serve as a safeguard against the volatility of the stock market, while simultaneously providing income from tenant rentals and property appreciation.5 Commercial real estate can range from a single petrol station to hotels, apartments, shopping centres, or industrial warehouses.
Investing in property involves the consideration of a number of factors, from a finance and investment perspective, but also from an urban development (physical, social, environmental) perspective. More and more people continue to invest in real estate, to the point that it’s becoming increasingly challenging to find a profitable real estate deal before the opportunity is seized by a competitive investor.
New business models and competition, extensive use of technology, and changing consumer preferences are redefining the CRE industry on a national and global level.7 Keeping up with this changing industry and gaining a thorough understanding of its dynamics is paramount to real estate success. When considering investing in commercial property locally or abroad, ensure you have the following six points covered:
Real estate is closely influenced by environmental, political, social, and broader economic forces that affect a property’s value, as well as people’s buying and selling decisions.8 Dealing with local and national businesses requires a firm grasp on your market’s characteristics.9 Understanding the supply and demand of your chosen market and its influencers is imperative.
Assessing a commercial real estate’s market is shaped by the following four considerations:10
- Demand: This is both the quantity of properties wanted, at a specified price and time, and a buyer’s willingness and ability to purchase a property within those parameters
- Rarity: This refers to a limited supply of certain types of property in particular locations. A buyer might be interested in a specific area and be ready to buy, but no properties are available
- Utility: Ask the question: Is the commodity suitable for use? For example, if the electrical wiring is faulty or if there are leaks, damp or mould, it’s not suitable for use
- Transferability: This refers to the ability of the commodity to legally change hands. If all of the above elements line up, but there are legal encumbrances at any part of the deed, the property cannot be purchased
2.1) Choose your approach
Two primary veins of investment that CRE includes are direct and indirect investment:
- Direct investment:11 Here, investors can become landlords through ownership of the property. People best suited for direct investment in CRE are those who either have a considerable amount of knowledge about the industry or who can employ firms that do
- Indirect investment:12 This involves investment indirectly through the ownership of various market securities such as real estate investment trusts (REITs). These are shares that receive income from a variety of portfolios (like complexes, health care facilities, hotels, offices, and retail spaces),13 exchange-traded funds, or by investing in companies that cater to the commercial real estate market, such as banks and realtors
2.2) Choose your specialisation
For residential investors who are looking to move into the CRE arena, they will need to ensure they understand the four major marketplace sectors:
- Retail:14 Due to the regular influx of new entrepreneurs and high failure rate of new retail businesses, turnover in retail real estate is high. Location and amenities are vital (for example, traffic flow and parking), along with knowledge of the economic and demographic status. These must collectively be analysed alongside business sales volume: who will be crossing your threshold, how will they interact with the retail space, will they buy the product, and will they return?
- Office:15 From high-rise buildings to suburban office complexes, this category is extensive. Though much of the volume is in leasing, when a sale happens the return is generally high. A firm understanding of the needs of the lessee (what sort of space and amenities does the business in question need?) is necessary and can directly impact success
- Industrial:16 Though industrial real estate was hit hard during the recession and lagged in its recovery, it is now improving steadily and is perhaps the most desirable commercial real estate class. Comprised of both leasing and sales components, this vein includes warehouses, manufacturing, high-tech and processing facilities. Due to the environmental, legal, and zoning issues involved, this specialty requires extensive expertise
- Business brokerage:17 A highly specialised area of CRE; here a broker is not only dealing with real estate alone, but also with inventory, equipment and customer-base valuation, among other factors. It’s imperative that the broker is able to help business owners with a realistic valuation, especially when it comes to intangibles – the value given to both clients and customers
Feasibility studies along with site investigation reports (SIRs) are a collection of questions and resultant data that assess the potential issues with the property site in question, or what needs to be done in order to meet an investment’s requirements.18
These studies contain comprehensive information about a business’ structure, products, services, and the market. Real estate feasibility reports can include the likes of land surveys, building permits, zoning laws, impact on the surrounding environment and natural habitats, traffic issues and general impact on businesses in the area, as well as the overall market opportunity.19 Feasibility studies are generally done before land acquisition and development begins.20
Real estate development involves a network of professionals, ranging from architects and civil engineers to landscape designers, site planners, attorneys, environmental consultants, surveyors and subcontractors, among others. The real estate industry contributes $3.5 trillion to the US GDP alone, of which $836 billion is construction spend.21 It’s therefore imperative that you have a trustworthy and reliable unit of specialists that work together to achieve an overarching goal, with the agility to handle planned and unplanned circumstances.
To avoid underestimating the cost of maintenance (especially in old buildings that may appear great value at first), conduct a careful study of the property and an accurate survey of the state of repair, not to mention the cost of maintenance, security, and the availability of backup systems if necessary.22 Once you’ve received comparative quotes from your network of specialists and suppliers, opt for the highest quality and fastest turnaround, at the lowest cost. Nurture established relationships and reward on-brief jobs; it’s a win-win for you both.
Real estate is the largest asset class in the world, yet it has been one of the slowest to adopt technology.23 Although innovation is increasingly serving property investors, buildings are still constructed in the same way they were a century ago. Pain points in the development process remain: for example, a property can take two days to find, but legalities and construction work can stall the process by months or even years.
This said, technology advancements and interconnectedness are allowing CRE business models to adapt. According to a survey conducted by REALTOR® in 2018, over 90 per cent of real estate firms have websites, and the most common feature on their websites were property listings. The survey further reported that 77 per cent of realtors actively use social media for real estate in some way.24 Every new wave of technology has seen corresponding innovation in real estate, propelling the launch and integration of handy apps, improved systems and investment software.25 Resulting in what’s come to be known as PropTech (property technology), it describes any technology developed for the real estate space, with the intention to improve and innovate core property processes. This spans anything from software, hardware, materials, and manufacturing.26
Since the 1980s, PropTech has grown from the introduction of personal computing and the popularisation of tools like Lotus and Excel (although launched 30 years ago, Excel is still the most commonly used tool in CRE), to advancements in data processing and storage. Large, ambitious companies like Airbnb have leveraged this shared economy to make physical spaces more attainable.27 The multi-trillion dollar global construction industry that traditionally invested less than one per cent of revenue in new technologies is embracing new software. Productivity is now being optimised at every aspect of building design, materials supply, and construction.
As investors increasingly opt for newer business models in a tech-enabled ecosystem, companies in commercial real estate are needing to realign business priorities and adapt to new demands accordingly. CRE investors need to be more agile in their business decisions than ever before. Due to the varied nature of running a CRE portfolio – including areas of research, analysis, sales, negotiation, and marketing – upskilling is valuable for personal and commercial growth. The most agile investors will not only build good relationships with their customers, but investment income too.28
Rather than working within set guidelines or in silos, CRE companies should innovate continuously and improve organisational fluidity. This requires companies and investors to be innovative, collaborative, and agile at every step.