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Investing in Commercial Property

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Investing in Commercial Property

Commercial property investment is buying real estate that consists mainly of office, retail, apartments and warehouse space.

Locating highly profitable investments requires a preliminary analysis of a set of major metropolitan markets to identify opportunities that will provide the highest profits at minimum investment risk.

The largest profits can be achieved when the value of a commercial property increases considerably after its purchase. The faster such an increase in property value takes place, the greater the investment profit.

Therefore, the most profitable investment opportunities are represented by the greatest increases in value. Hence, the key to successful commercial property investing is identifying properties with very strong value-increase potential.

The value of such an investment is determined in the property market by its income-earning capacity and the prevailing market capitalization rates.

Within this framework, the properties that have the greatest value increase potential are those that have the strongest potential for the largest increases in the rental income they command.

The rental rate that can be achieved by commercial real estate depends on market rents and the characteristics of the property (including its location). Generally, for well-located and managed real estate, increases in market rents pass on property rents as well.

Based on this analysis it can be strongly argued that the first step for highly profitable commercial investment is the identification of metropolitan areas with high likelihood of strong increases in market rents.

These are the commercial property markets with relatively low vacancy rate, and strong demand growth rates that outpace considerably supply growth, that is, the rate by which the existing inventory in the market increases. An example, of such a case would be a metropolitan office market with 5-6% vacancy rate at the most, office employment growth of 4% and office space supply growth of 2%

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