The adage “Location, location, location!” remains a cornerstone in the real estate world. When delving into commercial property investment, it’s essential to consider not only your tenant’s business growth but also the location’s potential for capital growth. Selecting the optimal location for your commercial property investment can pave the way for a high return on investment (ROI).
In the following sections, we explore the key factors when identifying the perfect location and property for your financial endeavors. By the conclusion of this article, our aim is to provide you with comprehensive insights into what constitutes an ideal commercial real estate location and empower you to make informed investment decisions.
How Does Choosing a Commercial Real Estate Differ from an Investor to an Owner-occupant?
commercial property investors must decide based on capital growth potential, while owner-occupiers prioritize business needs. While the fundamental factors in selecting the right commercial real estate are similar for investors and occupier-owners, their perspectives differ.
For example, owner-occupants must assess if the chosen location aligns with their business’s growth trajectory. High competition in the area may lead to lower demand, impacting their business viability.
On the other hand, investors focus on the potential appreciation of the property’s value over time. Economic growth and increasing business activities in the vicinity can transform the property into a lucrative asset, enhancing its capital growth potential.
On the other hand, investors focus on the potential appreciation of the property’s value over time. Local economic growth and increasing business activities can transform the property into a lucrative asset, enhancing its capital growth potential.
Why is Location Important in Commercial Property Investment?
Location plays a pivotal role in commercial property investment. Choosing the right location can significantly impact investment success, distinguishing between substantial profits and potential failures.
Even if a commercial property boasts numerous amenities and positive attributes, its value diminishes if the surrounding area lacks accessibility or convenience for potential occupants, customers, and clients.
Prime locations have easy accessibility. Easy accessibility increases their daily foot traffic, which increases commercial success for businesses. Because prime locations attract entrepreneurs looking for a place to set up shop, lease rates are also high. With high lease rates, an investor’s rental income is also high.
The high demand for commercial space and rentals in prime locations positions properties as low-risk investments in the eyes of lenders. Investors can secure funding immediately and add more assets.
Location Factors via Business Premise the Property Could Have
Commercial properties vary based on the potential business types they can accommodate. These properties must have accessibility to cater to these business types. For example, retail spaces must be accessible to customers. Office spaces must be accessible to employees. Lastly, industrial spaces must be accessible to major transportation routes.
For instance, in the first quarter (Q1) of 2023, commercial real estate has demonstrated robust performance compared to the last five pre-pandemic years. While office spaces have shown sluggish growth in lease income, other real estate segments have exhibited notable rental growth and minimal vacancy rates.
Retail Space
Retail spaces, trendy among coffee chains and quick-service restaurants, have recorded the lowest vacancy rates in Q1 2023. Bargain shops have also thrived, catering to consumers with reduced disposable income.
A commercial property’s value for retail space can significantly increase if it possesses high visibility:
- Proximity to a landmark or “anchor” store to attract more walk-in customers, such as plazas, shopping centers or markets.
- Location in a downtown area, enhancing accessibility and visibility.
- Ample parking facilities and access to public transportation.
- Availability of amenities such as ATMs, banks, and medical centers enhances customer convenience.
Office Buildings
As of Q1 2023, the rent growth rate for office buildings is the lowest at 0.7% due to the Covid-19 pandemic. However, these properties offer the potential for repurposing into mixed-use developments. Given the similar criteria for selecting office buildings and retail spaces, many properties are being transformed into combined retail and office spaces to optimize occupancy rates.
Industrial Properties
This type of property has outperformed others since Q1 of 2023. With online shopping getting more popular, the demand for warehouses and storage facilities has also increased.
Properties for industrial purposes increase in value if they are located near major transportation routes. By being near ports, railroads, and highways, businesses can reduce transportation costs and increase the delivery of goods.
Other Location Factors to Consider in Choosing a Commercial Property Investment
There are other location factors when choosing a commercial property for investment purposes. Local economic conditions and competition are necessary vital signs to predict future growth. Population demographics and zoning laws allow you to determine the best type of commercial property to invest in. Additionally, evaluating local taxes and infrastructure aids in assessing potential government benefits and contributions.
Local Economic Conditions
The location’s economic conditions determine the demand for commercial properties. One can measure the local economic growth using the Population/Employment Ratio (P:E Ratio).
In the P:E ratio, the population represents regional demand, while the employment rate represents regional supply. One can assess the location’s economic trajectory by comparing the P:E ratio to the state or national average. A low P:E ratio may indicate an underperforming local economy, while a high ratio suggests opportunities for investors to capitalize on local expansion investments.
Number of Similar Commercial Properties
The abundance of unoccupied commercial properties in a location can exert downward pressure on leasing and diminish property values. An oversupply of similar properties challenges tenants to distinguish themselves from competitors. It can result in decreased tenant income and reduced tenant retention for investors.
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Goodale & Barbieri | Location Matters
