- Category: Commercial Property
Location is often seen as the most important factor for the value of real estate. Especially with residential real estate. However, with commercial property location is not the only factor of value. It is important, but their are other factors resulting in value and market price.
Investing locally is best for property investment purchases. The other option is if you are an experienced investor, investing in triple net properties, which have leases that require the tenants to pay for all building expenses, then not local can also be considered for investment. However, this takes experience and research out of your area, while analyzing the lease contract to make sure the lease agreement requires the tenant to pay for all property expenses. Otherwise you will need to do a lot of traveling to your property for management. Either that or you will need to hire a local property manager in the area of your property investment.
Local property analysis is less difficult because it allows you to drive by car to the properties for building and location analysis before deciding on the purchase. And it lowers your costs because you do not have to travel long distances, perhaps by airplane with hotel lodging also needed. Also it helps that with local properties you already know something about the area. You can more simply research locally with types of businesses in the areas and look up the price that the property was previously purchased for along with the date of the purchase.
This is the statistical data of a population, such as how many people live in an area which is the population count for a city or county, income of residents, age, education, etc. Examples of this are population per square mile, number of families, income of the residents, and median age. The value of real estate can be favorable for new property investment in cities or areas where there is growth. When an area shows steady growth there will be more demand for goods and services with businesses needed to serve a larger population. This will increase the need of residential and commercial property while opening up increased property investment opportunities. Here are the basic elements of demographics.
Good Jobs Mixed With Levels of Income
Good and secure jobs along with income that supports the costs of the residents in areas will stabilize the population and could also result in an increase in population. With a stable and perhaps increasing population this means people will need housing and business services. This will at least stabilize the business interests and the needed properties. Statistical information on this is from the U.S. Bureau of Labor Statistics. https://www/bls/gov/ The BLS tracks job statistics on a national, state and city level.
Diversity or Variety of Businesses
With a diverse number of businesses with a balance of business types, this will protect against economic downturns. For example, if one type of business changes from doing well to not doing well and this is the only major type of business in a certain area then you will see an economic downturn for this area or city. This will damage the commercial real estate market since this will result in lower income for the residents with less money received and available for spending at local businesses. This will also result in less affordable housing. With this unless increased debt with lower interest rates charged is allowed this could result in foreclosures and the lowering of real estate prices. As examples, if a city is mostly tied to a particular industry, for example Detroit in the automotive industry or Seattle with aircraft manufacturing. Then if there are less sales in these industries the economics for these cities will go down in relationship to the decrease in sales.
Types of Business By Industry
Different industries have different growth rates. For example, farming has been slow growing. With any increase in value for real estate that is primarily in farm areas, this increase will normally be slow. Also farming requires more land per product value output. With this land used only for farming, this land cannot be purchased in high priced land areas. In contrasts, with the technology industry, computers and software, less land is needed for higher valued production. Also new improved technology can rise more in this industry with even higher valued and additional goods and services. This means that areas where they locate will cause property values to rise more and faster. Therefore investing in high-tech areas have greater potential for growth. However, all properties have a risk if over-priced according to actual income production and for sale market values.
The outsourcing of jobs from local areas to foreign countries can hurt local economies. We have seen this with large yearly trade deficits which for the United States has been over 350 billion dollars a year since the year 2000. Economic stimulation primarily by increased debt has a high risk. If jobs go overseas followed by businesses and plants closing locally then this will decrease productive employment. Real wealth in a society is created through the production of goods and services, the land, buildings and knowledge that are used to produce goods and services. Money, stocks, and bonds keep track of wealth, but they do not create wealth for an entire society. Outsourcing to foreign countries can cause a downturn in a local economy and create a poor and risky investment environment.
Analysis is needed to make sure jobs with income to the majority of people is not outsourced to foreign nations. A good indicator of a stable economy is companies’ paying stable or increasing wages to their employees, while still making income as a for profit company. Check for levels of unemployment as well and make sure they are not high and increasing in an area of real estate investment. Unless of course, a low enough real estate price is negotiated. Additionally, you can seek out areas that include businesses and governmental agencies that are traditionally resistant to economic downturns, for example, education with schools and colleges, government agencies, for example city hall and medical services.
One of the first things of analysis for parents with children of school age or soon to be school age, when looking for new areas and neighborhoods to move to are favorable and good schools in the area. Good schools with a high rating are important to parents for their beloved children. Good school areas will increase the desirability of neighborhoods and areas and with it increase the demand for homes in the area thereby increasing the residential home prices. With higher residential property pricing you can next expect an increase in commercial property prices in the same or nearby areas. Either that or the hope for some that some commercial property near residential areas can be rezoned to residential for needed homes in the area.
Along with the growth of the population with children and then their need for education, parents and their school age children also require a multitude of services, such as day-care centers, grocery and clothing stores and sometimes even restaurants. These needed businesses will then drive growth in commercial properties as a needed investment also. With this could also come an increase in commercial property prices following that of an increase in residential property prices.
Access and Parking
Access to its location by roads and paths is needed for any property. This is especially true for commercial property that requires drive to and walk in customers, often new ones. Ease of access, especially for retail business properties will mean a higher value than a property with limited access. Also important is adequate parking for cars and trucks once you reach the business location. If the property has a parking lot, the added land square footage alone should increase the value of the property. Plus simple and easy to see parking for customers should increase the amount of customers. Also public road side parking that does not require parking fees means less money spent by the potential customers with more money available to spend in the commercial store. This would be especially true for lower price product types like fast food restaurants and grocery stores.
Another factor is with new commercial property development. Public road access is needed for properties. With new commercial property developments like shopping centers and strip malls that has its own parking lot, you will need a vehicle entrance and exit and this may need to go through a current public walking path. Applying for a permit with a local government agency will be required.
For retail businesses a property in an area with a high traffic count can bring more potential customers to the business. Either that or a retail property near a major highway with easy access to the address of the property from connecting roads. Then a large and high sign can be added to the property advertising the businesses on the property. Information on traffic counts is helpful and can be provided by state or city departments of transportation. Historical information for traffic counts can also be helpful to determine if traffic is increasing or decreasing. A long term decline in traffic may indicate traffic is being altered by newer highways or roads elsewhere. This may indicate a potential decline in commercial property values where types of businesses benefit from high and stable traffic. In contrast, an increase in traffic counts can increase the value of commercial property in those higher traffic areas.
Properties are zoned for specific uses: residential, commercial, industrial, agricultural, and office. To show this cities and counties have specific letter and number coding. For example, letters are often first used to represent zoning types (R for residential, C for commercial, etc.) followed by numbers to represent the level of usage or amount of acreage or square footage required for individual properties to qualify. Zoning ordinances are to be based on the needs of usage for properties in the various areas. For example, all cities need residential for people to live in so we have residential property usage areas. Other areas are for commercial, office and even industrial for the production of goods. The specifics of required property standards are outlined by local government ordinances and must be followed. Otherwise in order to challenge or change zoning requirements for specific areas, appeals must be brought before a public administrative agency involved in the regulation of property usage. Since these agencies have legal experience to back up their zoning ordinances, legal knowledge often through attorneys needs to be used to have a chance to alter this for new property usages.
Before the purchase of property, especially land, there needs to be close attention to zoning regulations and ordinances. Otherwise there is a risk of zoning regulations not following the needs of and goals of new property owners. As an example, a new property owner wants to build a strip mall that will include a restaurant. Restaurants need enough parking for customers. The question is do local ordinances allow you to include enough parking spaces? If the answer is no, the property owner has to seek permission or change plans. Problems can be avoided by examining zoning before the purchase of property and getting site plan approval. If you do not get approval, an appeal needs to be made to the local governing agency.
- Category: Commercial Property
The primary wealth building property investment type is commercial. This includes office, retail, industrial, and special-purpose. The type you choose or favor may be according to your personality, knowledge, work ethic, previous employment and financial resources. Here is a link to do a property search. Below is information on the property types.
Office Building Property
Like all commercial property various types are in specific areas. For example, an area with small professional office buildings, larger buildings with many stories that would result in more and possibly larger office rooms. Along with single-tenant properties. Office buildings are for service oriented businesses, for example accountants, lawyers, architects, doctors, dentists, etc.
Like all commercial property the main criteria for office property with buildings is income stability. Does the property have reliable tenants for the rental income or can a purchaser use this for their own business type.Office buildings can be classified in categories as follows:
- Class A buildings are considered the best in terms of construction and location.
- Class B might be an average building located in an average location.
- Class C is used to describe below average. The weakness might be smaller units, an older building, or location is a workable, but less desirable area.
- Class D is the lowest rating and could have an area with a high vacancy rate, lack of maintenance and less amenities.
The main criteria for retail property is high traffic with ease of access and ample parking. This property can be large, medium or small. For example large with a shopping center or a large store property with a national tenant. Medium for a strip mall with a few tenants. And small with a single tenant. Shopping centers are multiple retail tenant centers with enough parking inside the center for all businesses. This often includes anchors that in addition to sales for their own business often draw customer traffic to the other shopping center business tenants. Anchors with high business traffic can be national chain stores or large grocery stores.
Large store tenants can be called big-box stores. This is characterized by a large amount of floor space, generally more than 50,000 square feet with the layout resembling a square or rectangle. This is with a national tenant that sells a large amount of items with its location in a suburban area, town or city. These commercial stores can be selling general merchandise or a large variety of items or specialty stores which sell goods in a specific type or range of products, such as hardware, books or consumer electronics. Shopping centers and big-box stores can both require large financial funding. Obviously, a shopping center that included a big-box store as the anchor tenant would require the most financial funding with the highest for sale price.
Strip malls also called a shopping plaza is where the stores are arranged in a row, with a sidewalk in front alongside a street with traffic. This is an investment that does not require as much funding as a shopping center or big-box store, but requires more property analysis. Analysis includes the current tenants, their income, how long they have been in business, how long is their lease agreement. It also should include an analysis of the property neighborhood, with population, income for residences and the automobile traffic of the street of the strip mall. They can be profitable, but this requires property management. The risk is a tenant going out of business with loss of income. This then requires marketing and reinvestment for another tenant.
This property type can be used for product industries where manufacturing of certain product types is done. Some industries are cleaner than others and require less maintenance and clean up. For cleaner industries they could be called business parks, for example, for medical and electronic manufacturing. For less clean they could be called industrial parks. For example for steel or petroleum. This property type could also be used for less complex, but still requiring organization, the storage of goods. These are known as warehouses. Less traffic is needed for industrial property. With less traffic it should mean a lower cost. However, large buildings with high ceilings result in higher square footage as cubic feet. This is calculated by multiplying length, width and height. With more cubic feet there is the possibility of more productive usage for the tenants as more goods could be stored for sale and with building renovation, second stories could be added.
Often the best investments in business or industrial parks can be multi-use buildings that can hold several different business tenants rather than special purpose buildings. The reason is that special purpose buildings are designed to meet the particular needs of the tenant, for example a restaurant or bank. If the tenant has signed a long lease contract this is not a risk. However, if there is a short lease and the tenant decides to leave or vacate, you are faced with finding the same kind of lessee or paying the cost of converting the building to a different use. With a multi-purpose building, or with a safe and secure tenant who has signed onto a long lease, you do not have this higher risk of vacancy with loss of rental revenue.
Undeveloped land can be a good investment if you buy it in the path of progress. This is a land location that is going to expand with new businesses and/or residential homes. If you purchase a favorable property at the right time you could get a higher return on your investment, especially if a major company decides to build on the property you own and then sign a lease to run their business. On the other hand if you guess wrong and can’t find a revenue property usage you would have money tied up in land producing nothing for you as an investor. Perhaps for a long period of time. In the meantime, you must pay property taxes and liability insurance, while having the possible additional expense of keeping the land maintained in an attractive manner for potential investors or renters.
The purchase of raw land could result in the highest property return on investment. However, it could also result in a negative or income loss on investment. This type of investment takes more planning, knowledge and a higher amount of additional revenue either from the original investor or with the addition of an additional investor. Of course, this additional investment is primarily needed for new building construction. Either that or the land needs to be used for farming eventually resulting in the sale of agricultural products.