Is commercial real estate a good investment right now?

The pandemic of the past couple of years disrupted lives and businesses globally. Across the United States, rising vacancies impacted real estate investments such as retail, office spaces, and apartment properties. The effects on real estate were also immediately felt within the food and beverage industries, restaurants and entertainment services, and the commercial properties which sustained them. 

Pandemic losses were tempered by the federal economic stimulus payments and forgivable business loans, as well as the federal authorization loosening requirements for Small Business Administration Economic Injury Disaster Loans (EIDL) with low rates and deferred payments.

Previously faltering industries are now seeing increased consumer demand, despite the spread of the Omnicron variant. Businesses that have successfully weathered the pandemic effects have met their business models and accommodated the safety of their patrons.

Current trends

The following categories of commercial real estate properties have shown themselves to be relatively COVID-proof for tenants, and also show increasing demand:

  • Industrial real estate
  • Medical facilities

During this pandemic recovery mode, the need for goods has only risen, compounded by global supply chain interruptions. That and the rise of digital delivery methods has increased the demand for industrial properties, such as warehouses, showrooms, storage facilities, data centers and distribution centers. For example, properties such as theater megaplexes and motel/hotel properties that failed and permanently closed during the pandemic shutdowns are now seen as prime opportunities. 

Disdained during the initial onslaught of the pandemic, properties such as retail spaces (former strip malls, retail, shopping centers) are now considered opportunities to be bought to lease for new markets. Often, these properties are located in prime locations of mixed residential and commercial zones. Entrepreneurial investors can utilize these types of properties for different markets than the properties were used for in their past purpose. 

There is currently a push for many metropolitan and smaller towns to create more living spaces and affordable housing. For example, theaters and motels which failed during the pandemic are now seen as opportunities to create affordable housing (often bolstered by city and state grants and low-interest funding programs). There is a demand for innovative housing complexes and tempting live/work units which can provide easy commutes and distance from crowded conditions for the workforces.

CRE investing today offers substantial benefits: 

  • Investments insulated from economic volatility in the markets.
  • Long-term property investment means higher values for the properties because the certainty of fixed income creates a higher valuation for the property in the marketplace.
  • Current tax codes allow CRE investors or owners to depreciate the value of their property and receive generous annual income tax deductions. The IRS allows the commercial property owner to depreciate their nonresidential properties over a long period. Therefore, more of your cash in property is protected from taxes. This adds up to significant benefits over time.
  • Tax codes allow the CRE investor or owner to be compensated for necessary property improvements.
  • The tax instrument 1031 exchange allows capital gains to be deferred. A 1031 exchange allows real estate investors to defer capital gains tax when they sell a property to provide more capital to invest in another investment property.
NAI 1st Valley Property Management takes on the risk for our CRE investors

The biggest hurdle for an investor new to CRE is just getting in the door. CRE investment entails an investment amount that is usually a large sum for any single investor to provide. CRE has higher price tags than many residential properties, but it typically commands higher rents with lower vacancy rates. CRE is appealing because it shows consistent returns, provides passive income, and has high growth potential.

Properties in mid-size townships to large urbanized cities can range from ½ million dollars to 3-5 million to 100 million dollar properties. But a new investor need not be deterred. Unlike with residential properties, there are more creative ways to get around funding limitations and begin building your CRE portfolio from as little as ¼ million dollars investment.

One of these ways is to consider the principles of Value-Add as it applies to CRE. Value add investments require expert knowledge in identifying the areas of the property where value can be added. It is imperative that the due diligence is undertaken and followed through in any such real estate transaction and we here at NAI 1st Valley specialize in this, with over 100 combined years of CRE experience at achieving success for our investment clients. As YOUR broker, we negotiate the deal based on the characteristics of the property, its location and previous uses. 

We discern the corrective actions needed to attain the full potential value of your desired commercial real estate asset. Then we factor those costs into brokering the best purchase deal for you, such as negotiating no cash down. Once your CRE deal has been closed, you will use your negotiated cash savings to make structural and cosmetic improvements. At 1st Valley, we are experienced in the steps necessary to add value to your commercial property, and will handle all of these steps for you. We provide detailed programs tailored to the needs of your particular property, the general market of the area, and for which direction would be most beneficial and fruitful for you as the owner. 

For example:

  • Branding the property by naming it (immediately identifies it with its purpose and position in the community).
  • Exterior facelifts (basic cleaning up, removing trash, painting, replacing siding)
  • Reconfiguring space (building additions, adding parking, storage, dividing up and/or finishing spaces).
  • Signage (large, clear, visible, and easy to read from the thoroughfares).
  • Security improvements (additions such as alarm systems, gates and shutters are attractive to both high quality tenants and will also lower your property insurance premiums).

A prime CRE property candidate in the past ranged from properties as complex as shopping centers and strip malls to outdoor recreational areas to resort housing. These properties are still good investments, but with them, an investor must be prepared to take on the risk for a longer period. This is why it is crucial to negotiate excellent long-term contractual leases, one of the important options for CRE investments. When your commercial property has a long-term contractual lease, you avoid the worries of immediate and fluctuating market exposures.

Commercial properties with tenants whose businesses floundered during the pandemic can be purchased for prime prices today. Contact NAI 1st Valley advisors to identify and discuss available commercial properties that are ripe for savvy investors to purchase and repurpose.