You have a good idea about what you’re looking for and what you can afford in your next commercial real estate investment. Excellent. Now’s the fun part—the hunt for the perfect commercial property. Sometimes in our enthusiasm– “It’s a beautiful property in the best zip code…”– we lose sight of important practicalities. Keep these considerations top of mind before making any commitments. We know far too many commercial real estate investors who wished they had…
1. Is the area saturated? Following the economic downturn several years ago, commercial real estate investors started scooping up properties in the major markets including New York, Washington, Paris, London. As a result, of course, commercial real estate prices began to soar, making it increasingly difficult to turn a profit. Now many commercial real estate investors are looking elsewhere. One example is European real estate fund managing firm Benson Elliot, which has spent £100 million in the last quarter on property in Manchester, Cambridge and the northern town of Preston, all outside of London. It’s happening in the U.S. too. If you find yourself gawking at commercial real estate prices in the big cities, you may want to consider that same. Look at what happened to real estate values in Williamsburg, Brooklyn (just outside of New York City) since 2009. It all depends on just how badly you need that major city status.
2. What are the zoning laws and development plans? It’s amazing how many commercial real estate investors find out they are handcuffed from doing what they really want because of zoning laws or the way the area is developing. Make sure your plans and aspirations mesh with the regulations and stipulations in area you’re considering. Find out if there are plans for adjustments to the city’s infrastructure that might affect commercial property—and if they pose any deal breakers. What are the noise ordinances? Will historic landmark status limit you from alterations? What kinds of businesses are off limits? What are the plans for parking? Pay a visit to the city’s Department of Housing & Economic Development (HED) and the Planning & Zoning Bureau online or in person.
3. Are you crime tolerant? Some commercial real estate investors can handle the headaches that can come from a high-crime area because the price is right. The important thing is that you know what you’re getting into. Just like if you were a residential investor, you need to be aware of the crime rates and trends. In addition to checking property and violent crime rates online, go around and speak to business owners in the neighborhood. Find out firsthand what’s been going on so you can make an informed decision. Consider whether the neighborhood may keep good tenants away and whether it’s worth investing in high-tech security equipment. Perhaps the area historically had a high crime rate, but it’s trending safer. Do some research.
4. What about natural disasters? Florida’s hurricanes—and hurricane building standards. California’s wild fires, earthquakes—and building codes. Tornados in the mid-west and flooding in areas across the United States. In addition to the prospect of your business and tenants falling victim to these calamities, you have to be sure you’re on top of the special building codes and insurance requirements that are part and parcel of buying commercial property in a disaster-prone area. South Florida, for example, has been hammered in recent years by the steady increase in hurricane insurance rates. Look at trends too.
5. Any potential liabilities? Once you find a potential property and assess its overall physical condition, look a little deeper. Are any environmental problems or potential liability issues lurking? Is there a presence of asbestos or lead paint? Consider the commercial property’s prior use. Was it once a dry cleaning facility, a recycling plant, a gas station, a paint manufacturing facility, or any business that worked with toxins? It will be well worth your time to look into the building’s history, as it is extremely costly to defend such liabilities in court should they arise.