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Commercial real estate is one of the most profitable and exciting investments you can make, and if you want your piece of the multi-trillion dollar pie, the key to success is knowing when and where to commit your capital.
It’s not as simple as looking at a price tag or the construction quality, as numerous factors must be taken into consideration to determine the overall worth of a property. The due diligence required takes longer than residential in some cases, but this is balanced out by the larger potential payoff.
The tell-tale signs are invisible to the amateur eye but clear as day to any industry pro. One such source of knowledge is Rob Finlay, founder, and CEO of Thirty Capital, who over the years has learned the tricks of the trade.
He’s made identifying the signs of true property quality both a habit and his business and is happy to share his expertise with those interested in the commercial real estate game. By following Finlay’s advice on what to look for and know, anyone can move with confidence when deciding whether or not to invest:
1. The Location
While much has changed in the commercial real estate game over the years, one aspect that has stayed steady is that location alone has immense value. Even a building that requires a little work to be usable has more potential value than a new one in an undesirable part of town.
“While internal conditions of a property certainly matter,” explains Finlay.
“Having the right location sometimes is simply enough. For commercial real estate, the amount of human traffic is a big indicator of future success and one that you really can’t put a price tag or directly control these days. We advise our clients to start with location when searching for new properties, and from there continue to whittle down the options after further research.”
Once you have your general location in mind, the next steps are to dig a little deeper into the metrics of a potential property.
2. Low Vacancy Rates
Another important metric to calculate the average vacancy rate of both the prospective building and those surrounding them. If you find a location with a vacancy rate that is well below the city’s norm, then this is a positive sign of desirability and bodes well for its future usage and profitability.
“It’s not just what is going on within your potential property,” asserts Finlay.
“But the vacancy rate trends of the area as a whole. This gives you a better forecast of what to expect in the months and years to come, and having this data handy gives you more information with which you can then flesh out the rest of your overall plan.”
3. Time On Market
An invaluable tool often overlooked in the negotiation phase of a deal is the property’s time on the market. Before you sit down with a potential seller, knowing this little tidbit can give you a critical edge that could cost or save you capital.
“Research how long each prospective listing has been available on the market before sitting down for a deal,” recommends Finlay. “For properties that have been on the market longer, you might be able to negotiate a lower price as the owner might be getting impatient. If the building is brand new to the market you might lack the same kind of leverage, but it also might be a sign that the area is up and coming. It’s a bit of a balancing act, but certainly something you need to know as a buyer before committing to any deal.”
4. Aligned Zoning Classification
It sounds simple enough, but before investing it’s essential to ensure a property has the proper zoning classification. These can vary from city to city, but the common uses for commercial properties are everything from office spaces, restaurants, and retail.
“Just because a property has the right location and metrics doesn’t necessarily mean it’s right for your goals,” notes Finlay. “And it’s vital you know what kind of uses are allowed by the city. If the zoning classification aligns with your strategy, then that’s a big green light to move forward with a deal. It’s not something you can adjust after the fact, and so this alone can be a sign that you should or should not move forward.”
These are all part of the due diligence required in the evaluation phase, and once you have a solid understanding of the key metrics, it’s time to add in a human element.
5. Word of Mouth
While data and statistics are important, one must also temper these large decisions with some less formal information. “Talking to those who live and know an area intimately can certainly help get a feel for a potential investment,” comments Finlay.
“And if the buzz around town is positive, that usually indicates you’ve discovered a gem. To get the best value for your dollar, you want to find areas that are rising in popularity that the market hasn’t quite caught up to yet. With intangibles like this, the people on the ground often can provide powerful knowledge that won’t show up through traditional means of research.”
When considering a commercial real estate property, it’s important to gather all the information you can before making your move. It’s both an analytical and intuitive decision, but by combining both and seeking out the promising signs, you’ll best position yourself for lasting success.
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