Commercial Property as Real Estate investment

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.

But if a wise choice is made under advice from experts in the field, you can really pick a winner!

What is meant by Real Estate?

Real estate is composed of many components. In case of real estate for residential purposes, the choices are endless. It includes homes of all kinds; independent houses and residential real estate or fancy condominiums. Real estate does not imply the building alone. It also includes the land on which the building stands and other immovable elements of the property like trees, garages and swimming pools. Sometimes real estate consists of plain land - a site where you are free to design and build the home of your dreams!  Real estate is really any fixed structure and the land it stands on!

 

Another significant component of real estate is commercial real estate. These include properties which are meant exclusively for generating revenue. It includes spaces meant for retail businesses or even designated spaces for office use. Commercial real estate also includes land and buildings meant for the setting up of industries and of course land and buildings used for running hotels, restaurants and the like. Apart from these, residential properties specifically designed to house multiple families as tenants are also classified under the heading of commercial real estate. Typical examples of this type are long stay homesteads and retirement communities offering accommodation on rent!

Real estate has been traditionally considered a safe bet in terms of investment. It is viewed as a hedge against inflation and a long term asset. What’s more, the asset class is considered to be far more transparent as compared to esoteric markets in equity and commodities. But it is also said to come with its own typical problems like the inability of being liquidated at short notice, in case of financial exigencies. But it is still chased by investors who are desirous of acquiring an asset that will be inherited by their descendants.

While real estate has always had its share of faithful investors, a recessionary economy offers unique opportunities to traditional investors as well as new converts. A crash in the stock market is seen as an indicator of consumer pessimism and risk aversion across asset classes. The money waiting on the side lines then rushes towards relatively safe havens of real estate and commodities like gold and oil. This rush accelerates further, often fueled by falling interest rates and attractive valuations in the real estate markets. Moreover a failing economy sounds the death knell for debt repayments, leading to slip ups in mortgage payments resulting in rampant foreclosures. These homes are almost then available for close to a song. Sellers also rush to sell their properties to guard against further erosion of value and prices.This scene represents a golden opportunity for entrants to the real estate market. Immediate demand exists for their properties in terms of rental homes and the payback starts almost immediately. 

The good thing about bad times is that they only get better! So when the economy shows the first signs of recovery, the buyers are back and property prices head north - a happy situation for people who entered at rock bottom prices. So buy that piece of real estate and watch the good times roll!