There are no guarantees in investing, but following the best practices and undertaking deep industry research is the best way to mitigate risks and develop a healthy portfolio that suits your investment goals.
While the commercial real estate market is a different game than residential, subject to various market forces, legal obligations, and financing regulations, the proper knowledge and a support network can unlock this investment vehicle for savvy investors.
There's no reason why everyday investors shouldn't have access to the power and consistency of CRE in their portfolio! So, keep reading to learn the basics and best practices of commercial real estate investing and how a team of CRE specialists in Chicago helps investors realize their CRE dream.
Before jumping into any investment strategy, research is crucial. Understanding the local market by researching key data points and metrics will provide a foundation on which assets to explore further.
To begin, research some of the critical indicators of the commercial real estate sector, including:
Supply and demand
Vacancy rates
Demographics and population
Rates of internal migration
Job market
Rental rates
When conducting market research, it's also imperative to consider the region's future patterns. So stay on top of commercial real estate news to keep up with any incoming government spending or upcoming projects in the area, which may impact prices, the job market, and supply and demand.
For example, there are different classifications of cities known as tiers based on factors such as population and the development of their real estate markets. Weigh the pros and cons and decide why you think commercial real estate is the right move for the location. For example, the real estate Chicago suburbs offer is traditionally strong in the third largest city in the country.
In contrast, investors may consider a lower-tiered city with positive indicators such as internal migration or upcoming investment.
Finally, it's essential to research the location-specific rules and regulations, such as federal and state requirements, that may affect commercial property in the region.
Commercial real estate is a broad definition encompassing a wide range of assets.
The four main types of CRE are retail, office, industrial, and multifamily, all subject to varying tenant demographics, lease structures, market drivers, and cash flow.
For example, a single enterprise may occupy a warehouse leading to one source of cash flow for investors. In contrast, a multifamily apartment building will house several lessees, each contributing to the rent, creating a multi-streamed cash flow.
However, property type is still location dependent, and some sectors perform better in different environments. As such, it's essential to match the market and property type appropriately.
Fiscally and legally complex processes govern commercial real estate deals. However, by partnering with professionals such as real estate agents, attorneys, property managers, and brokers, you can navigate the processes and maximize your returns in a shorter time frame.
Professional insights, guidance, and even deal-making assistance should be a top priority for first-time and inexperienced investors. This is because most commercial real estate deals will likely be facilitated by a large investment group, syndicators, or commercial brokers who will exercise due diligence over deal structure, payouts, contingency clauses, management, and more.
Property investors must ensure their investment will pay off and provide real value to their portfolios.
First, remember that CRE is often a long-term investment vehicle. Significant returns are realized upon the asset's sale due to appreciation.
Financial considerations include:
Cash flow
Expenses
Financing options
Rates and loan terms
Value-add opportunities
Specific economic research will change from asset to asset. For example, you should examine factors such as the rent roll and occupancy rate for a multifamily asset.
Again, CRE is a long-term investment strategy. Real estate investors should be financially and emotionally prepared to have their money tied up longer-term in the deal sacrificing liquidity for long-term appreciation.
The deal structure must also reflect this long-term outlook. Tenant attraction strategies, predicting trends in the market, and whether there will be any embedded rent increases over the deal's lifetime can all help extract value over time.
The CRE landscape is constantly shifting and subject to unexpected market forces and events like the Covid-19 outbreak or the boom of e-commerce, which changed the face of brick-and-mortar retailers.
Investors must be agile, informed, and up to date with the latest developments and commercial real estate news to combat the ever-changing nature of CRE and the surrounding regulatory environment.
Knowledge and market research is the basis of informed investing! Due to the complexity and scale of commercial real estate, savvy investors partner with real estate specialists to ensure investing success and minimize risks to their portfolios.
At Brian Properties, we're here to help you uncover the commercial Chicago market and match you to investment opportunities that suit your goals and outlook. Reach out to our team to learn more about our brokerage and management services.