Commercial properties are attractive investments because they offer a relatively stable income with continuous cash flows.
If you choose a commercial property in a good area, you should be assured of capital growth. While you may not be in that league at the moment, you should still know and understand the principles because one day, you may.
As with other real estate investments, choosing the right location and a suitable building is critical to the success of a commercial office building. Choose only prime locations and "smart" buildings with the latest technology. Always seek legal advice before signing any contracts.
As with all investments, tenant selection is essential.
While you cannot impose such strict requirements on the cleanliness of the premises as you would for residential or office tenancies, as a landlord, you should set standards for general cleanliness outside the building and the disposal of waste.
Rents are higher if it is a large office unit than if it is an open warehouse. Commercial leases are usually for three years and are adjusted annually to the consumer price index. Light commercial buildings are relatively easy to construct in a short time and take much less time than office buildings.
As a rule, rents and occupancy rates rise slowly and steadily during periods of economic expansion and fall slightly during recessions, but in general, the industrial market is less volatile than other commercial property markets.
When looking for an ideal commercial investment, consider the following factors:
Good location, as many commercial properties require access to highways and population centres for their employees.
Adequate on-site parking for employees and visitors.
Adequate access for truck and vans. This means that the entrance to the warehouse must be higher, and the access roads must not have steep slopes.
Good facilities for staff, including toilets, kitchen and air conditioning in offices.
Flexibility to include offices and showrooms on the premises.
Generous roof heights, as many tenants use modern shelving that stores goods higher up.
Entering the commercial real estate industry
There are several ways to enter the commercial market.
These generally require more capital than a residential property and include:
It would be best to design it for a known end user who needs the office space.
Recycle an existing building for office use or renovate an older office building and update it.
Purchase a portion of a larger building that is designated as an office building on a Strata title; or Purchase an existing building with tenants on a lease basis.
Tenants for office space
As with all investments, choosing a tenant for your office building is essential as careful selection will form the basis of your ongoing income.
The good news is that Australia's service sector is growing fast, and despite the trend towards working remotely or overseas, there is a steady demand for suitable office space.
The most desirable tenants are those who have a good track record in business or are in the type of businesses with growth potential.
Lawyers and accountants have proven to be very consistent over the years and enjoy an image of reliability and responsibility among the public.
Leases for office space are usually for 3 to 5 years, with the tenant paying all costs, often including the fees for the manager.
Rents may be fixed for the first three years or increased annually according to the consumer price index.
At the end of the initial lease period, there is usually an adjustment to the market rent.
Investments in office buildings are usually the domain of large consortia and institutions or investment funds, but smaller investors still have opportunities to acquire an office building.
Office buildings range from large, towering office buildings in city centres to small suburban office buildings.
Office buildings are usually classified by class to assess the age of the building, the location and the quality of the facilities.
Class A buildings are the most desirable and are characterised by high-end features and amenities and offer high status to their occupants.
Class B buildings are usually older buildings that were once Class A but now lack modern amenities and technical features.
They are traditionally let at lower rents and are attractive to smaller tenants due to their economic viability.
Class C buildings are often older and have not kept pace with trends. Sometimes there are opportunities to renovate older buildings and bring them back to Class B or A.
One of the essential features of an office building that tenants demand is parking or, if the building is located in the city centre, proximity to transportation for residents and clients.
Office building tenants also want proximity to banks and restaurants or facilities for lunch or entertaining clients. As a result, many large office buildings now have restaurants and shopping facilities to meet tenants' needs.
Suburban office buildings should be located near transportation routes such as highways, but preferably not on major roads or arterial roads, as visitors' access to these buildings is often limited to side streets or backyards. When looking for office space, tenants often calculate the ratio of the area allocated to each employee. In the past, employees were allocated an average of 25 m², including shared facilities, corridors and toilets.
While space requirements vary significantly by industry, employee space requirements have often dropped to 15 m² per employee.
Research everything from the big picture (economic forecasts and vacancy rates) to small details, such as walking and calling brokers to find out about rental rates in the area. Investigate the health of the economic sector you want your tenant to come from and changes in infrastructure and local and state government plans for the area. Have a commercial lawyer who can advise you on leases or conveyancing.
Always invest in prime retail, commercial or industrial locations - positions with high demand popular with tenants and buyers.
Consider visibility, access to public transport and parking.
When you start investing in commercial property, reduce your risks by buying a property that is already let to a good tenant with a long lease.
Since the value of your commercial investment depends on the rental yield, a good tenant with a long lease (at least five years) is the basis for a good investment. Check the rent per square metre and make sure it is not excessive compared to market rents.
If the rent in your lease is $500 per sq ft and the market rent is $700 per sq ft, then there is upside potential in the following rent review.
If the current rent is above the market rent, you may be paying too much for the property and have little upside potential at the rent review and, therefore, a higher capital value.
This includes the length of the commercial lease, the frequency and arrangements for rent reviews and who pays the running costs.
It would be better to have a long lease with regular rent adjustments to the market with a minimum CPI increase and a tenant who bears all the costs.
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