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Understanding the Risks Associated with Commercial Real Estate

Discussion in 'Commercial Property' started by Chilliblue, 3rd Aug, 2015.

  1. Chilliblue

    Chilliblue Well-Known Member

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    A commercial real estate property that has been well researched and purchased can provide a solid income requiring little attention whilst there is a tenant providing the income flow. However, like all investments, there are always risks. You should have a clear understanding of risks that affect your investment, so you can plan to mitigate them. Common risks may include:


    Changes in Infrastructure

    Changes to or the implementation of major infrastructure has both a positive and negative effect on commercial property returns. While infrastructure can attract commercial investment to an area, it can also have a negative effect of drawing tenants from their existing tenancy. Precincts that are close to CBDs and main transportation hubs are often in higher constant demand whilst those precincts in a new growth areas further out may have cycles of demand. Learn to keep abreast of any proposed changes.



    Lease Terms and Liquidity

    Prolonged periods of vacancy between tenancies are common and should be planned for. A commercial real estate investor needs to ensure that they have the ability to carry all costs during a vacancy. This is where the lease term that you place your tenant under is important. The longer the lease term is, the lower the risk. It should be noted that having a lease does not always ensure a secure form of cash flow as tenants can neglect making payments or vacate the lease without any warning .



    Location

    The location of commercial real estate property can be a risk if the chosen location is not adhering to market trends. This could be due to a change in zoning, a change in infrastructure or any other reason. When commercial real estate loses its appeal to the market, this has a direct effect on the value of the property, on the tenant that you wish to hold and on cash flow.



    Size and/or Type of Commercial Property

    The size and type of commercial real estate property will determine the holding costs. A large heavy industrial warehouse will cost more to hold than a small office suite. A large commercial building leased to one tenant will have greater expense than a single retail shop. Understanding your holding costs and developing strategies to implement during vacancy periods will be beneficial.



    Supply and Demand

    Lack of available property will create a demand, increase yield and assist in tenant retention whereas an increase of available properties has the opposite effect as existing tenants are able to look elsewhere to house their business (whether it is a simple upgrade or expansion). Changes in supply conditions can create potential problems and should be monitored closely.


    Please note when reading these posts, you should always seek your own independent legal and financial advice
     
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  2. Scott No Mates

    Scott No Mates Well-Known Member

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    @Chilliblue - other factors to consider include:
    • Zoning both current and mooted
    • Functional obsolescence
    • Flexibility or ability to adapt to changing uses
     
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  3. Beano

    Beano Well-Known Member

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    Scott No Mates in your line of work and your personal investments do you come across many "lessor's interest " land only investments like say the Sydney GPO and if so have have compared with normal property investments?
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

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    @Beano - most notable is most of the commercial area adjoining the Harbour Bridge in The Rocks - all long-term leasehold but there are other buildings like Woolworths which is a ground lease expiring in the near future (<10 years) but earmarked for demolition as part of the grand boulevarde on George St.
     
  5. Beano

    Beano Well-Known Member

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    I saw in a recent news clip the government was considering selling a few leasehold but a seldom see the freehold for sale
    It the freehold i want to buy more of
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Finance............................ what should be an agreement until the death of the debt often isnt

    ta
    rolf
     
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