Real estate investments mean homes, flats and condo units to most of us. The more ambitious among us go beyond the norm and invest in second homes while the really prosperous ones think about vacation pads. But a foray into real estate investments is quite incomplete without due consideration to commercial property.
Rapidly growing cities have resulted in the emergence of newer categories of real estate. Cities are job generators and people magnets. This kind of exponential growth drives demand for real estate elements like retail spaces and office spaces. Housing apart, there is galloping demand for amenities related to shopping and dining. But cities are not the only locations for commercial property. Increasing urban congestion has led to the gradual shift of populations towards quieter suburban locations and smaller towns too! And development of this kind usually heralds the emergence of clusters of commercial real estate to service the area.
So what is commercial property really about? Commercial property is composed of elements of the property landscape which are not meant for personal use by the investor. The sole objective is to generate income for the investor. The investor may choose to reap the benefits in terms of periodic rental income, leasehold income or even as capital appreciation realized by the sale of the property at higher than purchase prices.
The logical elements of the commercial property space include retail properties, shopping complexes, office buildings, hotels, motels, restaurants and warehouses. Residential units can also comprise commercial property, particularly those constructed with the sole purpose of monetizing their value in terms of rental income. Large areas of land often serve as seeding sites for development and are hence considered as prime examples of commercial property.
Development of commercial real estate typically follows development of residential neighborhoods. In bust times too, commercial properties see mortgage defaults and foreclosures a little after the bloodbath in the residential space. This is to be expected since investors of this universe have deeper pockets and risks spread over a large variety of asset classes.In that sense, commercial real estate is considered a laggard indicator of the economic situation. A wise investor in the space is astute enough to realize this and read trends early to take effective evasive action.
Factors impacting the choice of commercial real estate and purchase processes are very different from those in the residential category. The investment involves higher outlays and mortgage payments and lenders are well within their rights to set more stringent eligibility criteria. Zoning restrictions prohibiting commercial properties in certain exclusive residential neighborhoods may deter many a prospective buyer. Commercial properties, situated even in mixed zones need to be evaluated in terms of attractiveness to potential buyers and tenants.
The investor also needs to watch macroeconomic trends like demographics, interest rates, overall economic climate and of course government policy. Local considerations like abrupt changes in zoning laws or even an unexpected collapse of a local industry can lead to fluctuation in perceived value of the property.
