Why is it worth investing in commercial real estate?

Like any financial investment, real estate investments have advantages and disadvantages. Private and commercial real estate investors should know them to assess whether this capital investment fits into their portfolio.

Advantages of Commercial Real Estate

One of the most significant advantages of commercial real estate is undoubtedly its long-term rental income. Whether they are office buildings, shopping centres or hotels, the buildings are usually rented out on a long-term basis. If the tenant is a large company or an international group, loss of rent is rare. If, on the other hand, you rent to small businesses, the self-employed or freelancers, the return on commercial real estate can be at risk. In the case of smaller companies, there is a significant risk that a rent payment will not be made in the long run because the income does not flow continuously. Nevertheless, the return on commercial real estate is usually higher than on residential real estate. The choice of a suitable tenant thus has a direct impact on the return on a property.

Most commercial properties are rented for ten years. This reduces the risk of constant fluctuation. Many companies want to commit themselves to a particular office location in the long term and are therefore interested in a lease with a term of several years. Rent payments are secured during this period, especially for larger companies.

In this context, it only plays a subordinate role in how the external environment of the property develops. This is where commercial properties differ significantly from residential buildings. A private tenant may refuse an apartment if there is a waste incineration plant in the immediate vicinity. This risk is lower for a commercial tenant with a long-term rental agreement.

Another advantage is the return that can be achieved with a commercial unit. With an affordable purchase price and a reasonable rent, the owner achieves an excellent rental return. In addition, the owner can deduct the costs incurred in connection with the maintenance, thereby reducing his tax payments.

Disadvantages of Commercial Properties

One of the biggest disadvantages of commercial properties is the entrepreneurial risk. In the case of vacancies, it is often easier to find a new tenant for an apartment than for a commercial property with a warehouse or office space. Insufficient utilization can be a problem, especially for large properties. If the property is financed and there is no rental income, institutional investors and private investors are faced with the problem of having to pay the instalments for a loan without generating rental income. For many private investors, it is not advisable to invest directly in commercial capital investments because of financial feasibility challenge.

However, private investors now have exciting alternatives if a direct investment in a commercial investment is out of the question. These alternatives circumvent the disadvantages and still benefit from all the advantages of a commercially rented building, warehouse or production facility. One of such alternative is crowd investing.

2021 Commercial Real Estate Stats

Commercial real estate market conditions are improving slowly, but remain weak compared to the period before the Covid-19 pandemic, as demonstrated by responses from NAR members to the Q1 2021 commercial real estate market survey.

The first quarter of 2021 saw a 28% drop in large commercial real estate acquisitions, with transactions declining across all types of properties, except the hotel sector. Transactions declined by an average of 1% among commercial members of NAR who participated in the survey and whose acquisitions totaled less than $2.5 million.

According to respondents, land and industrial property sales increased, while other types of commercial real estate sales declined. Though commercial real estate prices continue to rise, their value is still broadly down by 6% compared to a year ago.