There are a lot of strategies that can be used by those interested in making investments in the commercial real estate (CRE) market. Larry Polhill, former director of APFC and handling investors questions with the Security Exchange Commission (SEC), has recently developed a new list of possible strategies that people could follow.
Understanding the CRE Market According to Larry Polhill
The CRE market was significantly affected by the Great Recession. However, it did so differently than the residential property market. Foreclosures did exist in the CRE market, but not as many as in residential. Furthermore, foreclosed properties were usually not distressed. Because commercial properties are usually of high worth, they are more difficult to sell, particularly if investors are not feeling secure. While this has now changed, with the recession being over and interest rates beginning to rise, the market is changing again.
CRE markets are also heavily influence by geopolitical events. When the USA elected now President Donald Trump, there were some heavy fluctuations on the market and it is still not clear where this is going to go. Similarly, the Brexit decision in the United Kingdom has changed the market as it has pushed the attention of foreign investors in different directions. Hence, old strategies are having to make way for newer ones as well.
Old and New Strategies in CRE Investments
One of the preferred strategies in the CRE market is that of buying a distressed property, fixing it, and selling it for a lot more money. The problem is, however, as stated, that many of the foreclosed properties were not terribly distressed. Secondly, commercial properties are often subject to zoning restrictions, so it may not be clear how any improvements can, or should, be made. After all, this will also depend on the tenant who ends up using the property.
Because of this, a newer strategy with CRE properties is to become a landlord. Because demand for commercial properties is still high, but many business owners are still too insecure to close a mortgage on a huge property, owning a CRE plot to rent out is an excellent investment. However, this is risky. There is always the question of whether the property will continue to be valuable or, preferably, grow in value.
Finding Distressed Properties
Overall, most experts agree that distressed properties make for the best investment, but they also come with some significant risks. According to Polhill, those risks include:
- Rent is below market.
- Vacancy rates are high.
- Management is poor.
- The condition of the building is poor.
- The operating income is low.
- The building has no amenities.
Those are, after all, the most common reasons for a CRE property to become distressed. Hence, as a potential investor, it is vital that you look into those issues before agreeing to buy. Finding a property, meanwhile, is down to building relationships with agents and realtors, who can inform you when a property becomes available. But it is your responsibility to look into how viable the property is.
Daryl Green