While commercial real estate has come back from its Covid low point, it’s still in a state of recovery and reorganization. Towering office buildings that were once busy now stand half-empty as millions of office workers have decided they would rather work from home.
However, office buildings aren’t the only type of commercial real estate. There are also retail shopping centers, apartment complexes, and industrial parks. Many of these have continued to perform well, even if the retail side of things has had its ups and downs.
To be clear, commercial parts of real estate are still performing well, provided one pursues the right opportunities. One of the companies faring better in the current retail market is First National Realty Partners.
So, what are the downsides of investing in commercial real estate, given the current upheaval in the market?
Vacancies Are Expensive
When your properties are completely full and you’re receiving rent checks from all of your currently available properties, life is good. When businesses start to fail or decide to move to another location they feel offers a better opportunity, things can be bad. Tenants that remain may start to question why they continue renting in an area that is declining.
Once a property becomes vacant, the owner still has to pay the maintenance fees for the entire property. Worse still, if the owner was forced to evict a tenant, they may never receive the back rent that is owed, which further complicates their finances.
Getting a new tenant isn’t like getting a new individual to rent an apartment. In order for commercial real estate to work, businesses have to want to rent from you. In times of economic uncertainty or when debt is expensive thanks to high interest rates, getting a new tenant to invest tens of thousands—or millions—of dollars to set up shop in your property can be a tall order.
Changing Market Winds
Often, vacancies are caused by market headwinds. Interest rate increases and economic recessions are just a few of the challenges this industry has to face. One way to mitigate this risk is to invest in ETFs for commercial real estate. Even if one area of the ETF’s investments may be in decline, others may be thriving.
Once the winds of economic change blow, the results can be hard to predict. In many cases, the success of commercial real estate may depend on the state and local government making decisions to attract new investors to an area.
High taxes, declining property values, and large businesses pulling up stakes and relocating can cause a cascading effect on the commercial real estate market in an area. With the right government leadership, these effects can be mitigated, but in many cases, local government can only do so much to encourage investment while maintaining a healthy balance sheet from their tax base.
High Operating Expenses
Operating expenses become a bigger and bigger problem the higher a commercial real estate company’s vacancy rate is. Operating expenses are one of the key reasons malls across America have failed over the years.
When an entire indoor shopping mall is 75% vacant, the property owner must continue to light, heat, and cool 100% of the floor space and cover all maintenance costs. This can lead to their diminishing income being put entirely towards just keeping the lights on.
Companies like First National Realty Partners and their competitors like Agree Realty, have done a better job than most when it comes to retail commercial real estate. They’ve carefully chosen their markets to ensure that their properties maintain high occupancy rates in areas that are economically stable.
They also prioritize retail tenants that have a tough time being defeated by the likes of Amazon. Things like grocery stores, auto shops, and restaurants all offer products that are not cost-effective to shop online when delivery times and expenses are factored in. This makes them resistant to decline.
Taking the Plunge
Commercial real estate can be a complicated field with many pitfalls. With diversification and careful preparation, however, you can find your way to success!