Buying A Commercial Property And What To Look For
Typically, the phrase “commercial” refers to office space.
Commercial buildings are appealing investments because they provide a generally consistent income with consistent cash flows.
You should expect capital growth if you buy a business property in a desirable location. While you may not be in that league right now, you should know and grasp the ideas because you could be one day.
Choosing the correct site and structure, like with any other real estate investment, is important to the profitability of a commercial office complex. Select only ideal sites and “smart” buildings with cutting-edge technology. Before signing any contracts, always obtain legal counsel.
Tenant selection is critical in all ventures. While you cannot impose the same stringent restrictions on the cleanliness of the premises as you would for residential or office leases, as a landlord, you should establish standards for general cleanliness outside the building and garbage disposal.
Rents for huge office units are greater than for open warehouses. Commercial leases are typically for three years and are yearly updated to reflect the consumer price index. Light commercial buildings are significantly easier to create in a short period of time than office buildings.
Rents and occupancy rates typically climb slowly and consistently during years of economic boom and decline somewhat during periods of economic contraction, although the industrial market is less volatile than other commercial property markets.
Investment in office property
When looking for an ideal commercial investment, consider the following factors:
- Good location, as many commercial properties require access to highways and population centres for their employees.
- Adequate on-site parking for employees and visitors.
- Adequate access for trucks and vans. This means that the entrance to the warehouse must be higher, and the access roads must not have steep slopes.
- Good facilities for staff, including toilets, kitchen and air conditioning in offices.
- Flexibility to include offices and showrooms on the premises.
- Generous roof heights, as many tenants use modern shelving that stores goods higher up.
Entering the commercial real estate industry
There are several ways to enter the commercial market.
These generally require more capital than a residential property and include:
- The real estate market develops a new building from scratch. It would be best to design it for a known end user who needs office space.
- Recycle an existing building for office use or renovate an older office building and update it.
- Purchase a portion of a larger building that is designated as an office building on a Strata title or Purchase an existing building with tenants on a lease basis.
Tenants for office space
Since with any investment, selecting a tenant for your office property is critical, as this will form the foundation of your continuous revenue.
The good news is that Australia's service industry is rapidly expanding, and despite the tendency toward working remotely or abroad, there remains a consistent need for acceptable office space.
The most attractive tenants are those with a proven track record in the company or those in industries with high development potential.
Lawyers and accountants have shown to be highly constant throughout the years, and the public perceives them to be trustworthy and responsible.
Office space leases are typically for three to five years, with the tenant responsible for all expenditures, including management fees.
Rents might be set for the first three years and then raised yearly in accordance with the consumer price index.
The market rent is frequently adjusted at the conclusion of the first lease term.
Characteristics of office building characteristics of office buildings
Office building investments are often the realm of huge consortia, organizations, or investment funds, although smaller investors may nonetheless purchase an office complex.
Office buildings varies in size from big, towering structures in metropolitan centers to tiny suburban structures.
Office buildings are often classed by class to analyze the building's age, location, and facility quality.
Three classes of office space are usually distinguished.
- Class A buildings are the most desirable and are characterised by high-end features and amenities and offer high status to their occupants.
- Class B buildings are usually older buildings that were once Class A but now lack modern amenities and technical features.
They are traditionally let at lower rents and are attractive to smaller tenants due to their economic viability.
- Class C buildings are often older and have not kept pace with trends. Sometimes there are opportunities to renovate older buildings and bring them back to Class B or A.
Parking zone features and amenities
Parking or, if the building is situated in the city center, closeness to transit for residents and customers is one of the crucial amenities that tenants need in an office building.
Tenants of office buildings also desire to be close to banks, restaurants, and other amenities where they may eat or entertain guests. As a consequence, many major office buildings now contain eateries and retail centers to fulfill the demands of their tenants.
Suburban office buildings should be near transit lines such as highways, but not on main or arterial roads, since guests' access to these buildings is often confined to side streets or backyards. When searching for office space, renters often analyze the percentage of space allotted to each employee. Employees were formerly assigned an average of 25 m2, which included shared facilities, passageways, and toilets.
While space needs vary greatly by business, employee space requirements have often been reduced to 15 m2 per employee.
Tips for building wealth through commercial real estate
1. Due diligence and market research and understanding of the market
Research everything from the big picture (economic forecasts and vacancy rates) to small details, such as walking and calling brokers to find out about rental rates in the area. Investigate the health of the economic sector you want your tenant to come from and changes in infrastructure and local and state government plans for the area. Have a commercial lawyer who can advise you on leases or conveyancing.
2. Invest in prime locations
Always invest in prime retail, commercial or industrial locations – positions with high demand popular with tenants and buyers.
Consider visibility, access to public transport and parking.
3.Buy a rented property
When you start investing in commercial property, reduce your risks by buying a property that is already let to a good tenant with a long lease.
4. Quality of the tenant and term of the lease.
Since the value of your commercial investment depends on the rental yield, a good tenant with a long lease (at least five years) is the basis for a good investment. Check the rent per square metre and make sure it is not excessive compared to market rents.
If the rent in your lease is $500 per sq ft and the market rent is $700 per sq ft, then there is upside potential in the following rent review.
If the current rent is above the market rent, you may be paying too much for the property and have little upside potential at the rent review and, therefore, a higher capital value.
5. Structure of the lease
This includes the length of the commercial lease, the frequency and arrangements for rent reviews, and who pays the running costs.
It would be better to have a long lease with regular rent adjustments to the market with a minimum CPI increase and a tenant who bears all the costs.
6. Newer construction
In general, newly built commercial properties are more attractive to tenants and require minor renovation. They also have higher depreciation benefits.
7. Flexible design
This means that you will not be faced with an inefficient layout when subletting. For industrial buildings, this means that the proportion of office space can be easily varied.
8. Invest in properties with development potential.
Look for undercapitalized properties—those where tenants are paying below-market rent or those that are underdeveloped.
Now is the time to take advantage of the opportunities that the current real estate markets offer.
Get in touch with Ryder Lawyers – Commercial Property Lawyers