The Best Time to Start Investing in Commercial Property

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The Best Time to Start Investing in Commercial Property
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It is perhaps the single most commonly asked question on the part of all first-timers looking to get into the commercial property investment racket. After all, it has hardly been a secret that there’s enormous money being made in commercial property, many of the world’s richest investors’ property portfolios are made up of it. The properties are there, and demand is usually consistent and the industry’s tycoons just keep getting richer – it is a fantastic opportunity that’s pinned by that one important question:

When exactly is the best time to buy into commercial property?

 

A Cyclical Investment Opportunity

For much of recent history, commercial property values have been somewhat cyclical in nature. Not only has this given market analysts a pretty conclusive view into the way things have gone in the past, but also the means by which to predict how costs will continue to behave in the future. It is mainly a foregone conclusion that the cyclical trend will continue indefinitely.

The actual prices of commercial real estate are affected by a series of primary pressures, which includes the following:

  • The demand for such properties at the time,
  • The general state of the economy,
  • The interest rates attached to the necessary buyer financing deals,
  • How much inventory there is still waiting to be put to use.

In accordance with all of these, prices have a tendency to change quite wildly from one extreme to the other, though as mentioned this has tended to happen in something of a cyclical pattern throughout recent history.

 

The Commercial Property Cycle

Once an investor has evaluated the cycle as a whole and the current factors affecting commercial real estate, they can sort out when and where to make an investment. The commercial property cycles consist of four separate phases, Explained below:

Recession

When commercial property prices take a tumble, it becomes increasingly difficult for those looking to make an investment to gain the financing they require. Leading to the recession phase of the cycle and is the time during which sellers of commercial properties face tremendous difficulties in getting rid of the vacant lots they own.

In such times, it is not uncommon for the prices of commercial properties to fall massively below their usual market worth. During the same time, foreclosures on properties yield additional opportunities for a cheaper price. During these times, those with an abundance of available capital or the ability to access financings are privileged to some seriously rich pickings and often take the opportunity to expand their property portfolios significantly. Needless to say, this is by far the very best time to invest in commercial property due to availability and the lowest prices.

Recovery

As prices starts to climb once again, and general confidence in the market lifts itself off the ground, the commercial property cycle enters the recovery phase. However, despite the signs of improvement this remains a time during which the vast majority are still somewhat wary to make investments. Financial products for buyers become more readily available as interest rates decline. While the overall property prices begin a slow, staggered climb back in the right direction.

Those in ownership of properties often choose these times to go about refurbishments and improvements in the hope of increasing their rental income and resale values. On the whole, the recovery phase represents another excellent time to invest in commercial property.

Expansion

As interested investor numbers grow and the expansion of the market in general steps up, the commercial property cycle enters the expansion phase.

It is a time often referred to as a market’s ‘boom’ where property values accelerate at the fastest pace and will in many cases spike to their highest levels ever. Demand gets extremely high which causes prices to rise even further. Financing is practically being thrown at investors in order to generate income for the lenders, and the whole market seems to be on something of a universal high.

Commercial real estate becomes the talk of the town for analysts and hits the headlines of the global financial press – suffice to say. This is the gravest point to think about buying or investing in the property and the very best time to make a sale.

 

Burst

Following the expansion phase comes the commercial property cycle’s Burst, which is where prices start to slip from the dizzy heights hit during expansion and vacancies on the whole once again begin to accelerate.

This phase is triggered by the boom from the previous stage and the way in which the market’s performance was wholly unsustainable. Having been completely overrunning by investors and properties to such a point where many begin walking away from the market and looking elsewhere.

Overall property values continue to decline as interest waivers and supply outweighs demand. In terms of whether or not it makes sense to sell or buy in the contraction period depends on each unique case and the specific opportunities each geographical area presents.

A Consistent Pattern

What’s important to note is while much of the effects of the commercial property cycle may vary, the order the phases present themselves in never changes. Instead, what does change is the severity of each phase, how long each of the phases may last and how quickly the next phase in the cycle may begin and develop. It is the understanding of the phases, and the accurately predicting of when and where the next phase will set in that makes the biggest difference of all in terms of successful property investment.

Like all other markets the world over, success in commercial property can be achieved only by buying low and selling high. This is something that’s made relatively easy in principle by acknowledging and analysing the commercial property cycle, thought the trick comes in knowing not only what’s coming next, but when to react and how.

The simple answer to the question is to buy up properties in the recession phase of the cycle in order to then sell them on during the expansion or ‘boom’. However, if things were as simple or black-and-white as this, everyone in the commercial property investment game would have never made a mistake.

Needless to say, this is not the case at all.

The Pros and Cons of Commercial Property Investment

As for weighing up whether the commercial property investment gig is the way to go, it is important to understand and accept the game’s inherent pros and cons. The potential value and rewards of solid investment are well-documented, but at the same time it is far from a guaranteed money-spinner.

Commercial Property Investment Pros:

•    Income – The annual return rate offered by an excellent commercial property can be in the region can vary from 12 - 18%. This is higher than something expected from a residential property of the same calibre. In addition, resale values can be extraordinary.

•    Lower Running Costs – With a commercial property you are much more likely to find that all commercial and property taxes are met by the tenants, as opposed to the owner. Again, with residential properties it is usually the other way around.

•    Demand – In the right place and with the right commercial properties, it is possible to pretty much guaranteed year round market on a long-term, indefinite basis. As such, long-term leases are much more likely than with residential alternatives.

 

Commercial Property Investment Cons:

•    Setup Costs – It is not as easy to get financing for a commercial property investment and chances are you’ll need to stump up a larger deposit and higher subsequent repayments.

•    Upkeep – In commercial properties, things do not go as wrong as residential abodes, but when they do it is not uncommon to be bumped with a bill of say $15,000 for a whole new floor.

•    General Risks – With dozens, hundreds or even thousands of people using your premises each day, there’s a much higher risk for the property to suffer a damage or being liable in any kind of claim in case someone suffers an injury.

 

In Summary

Theoretically speaking the commercial property game is a pretty simple one – you buy low during the recession phase of the cycle in order to then sell high during the expansion phase. However, this also happens to be true for every other investment opportunity in the world – the key lies in being able accurately establish when these highs and lows will occur, in order to then modify buying and selling decisions accordingly.

Of course, technically there’s no such thing as a 100% safe investment and this is a lesson learned often rather painfully by thousands of newcomers to the game every year. However, there’s a great deal to be said for dedicated research and commitment, not to mention following the lead and the teachings of those that have not only been in the commercial property investment business for year, but made more money than most of the world’s public combined.

Author Info Manish Khanna

Manish is founder of Business2sell Group of Websites. 

Business2Sell.com.au is one of the leading business and franchise for sale listing websites. We work with our business brokers, commercial agents, franchisors and private sellers to help them connect with the right buyers for their opportunities. 

With website now functional in Australia, United States, United Kingdom, Canada, New Zealand and South Africa. We have over 18,000 businesses for sale listed, with over 220 Business Broker and Commercial Agent. 

I have over 20 years of experience in Web Industry; I have been involved in websites industry since the early years of 1996-97. In my professional career I may have worked for over 10,000+ websites. My Specialty is to build portals or complex online applications.

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