5 Shocking Factors Impacting Your Commercial Real Estate's ROI
Investing in commercial real estate can be both exciting and profitable. You may transform unwanted buildings into beautiful, productive, and profitable spaces. But it’s also risky. Your investment’s success hinges on its resale value.
What makes your investment's return (ROI) fluctuate? How do you balance costs and potential value?
Let’s find out what our experienced CRE advisors at Terra Alma in Atlanta suggest.
1. Operational Efficiency
When preparing a commercial real estate investment for resale, consider its operational efficiency. Does it cost a lot to heat in winter and cool in summer? If so, that’s a drawback for future owners.
Invest in improvements to make your building more efficient. Switch to energy-efficient LED lightbulbs and secure fixed-rate electricity contracts. Examine your HVAC system—is it efficient, or is the furnace nearing its end?
Your investment will be more attractive and profitable if future owners see a building that minimizes day-to-day operational costs.
2. Leaseholder’s Desirability
Consider how much ROI the building currently generates. Does it have reliable leaseholders who pay timely and plan to stay long-term? Or does it struggle to rent office space, attracting leaseholders who only want cheap rent?
The building's history can predict its future. Turning around a tenant base from low-quality to high-paying, Class A tenants is challenging if the building has only had sporadic, less desirable tenants.
However, if the building has a track record of attracting successful tenants with growing businesses, it will be more profitable and attract desirable tenants more easily in the future.
3. Demographics
Analyze the demographics around your property. Is the area well-educated? Are there think tanks, universities, or other innovation hubs nearby?
Your building should be near a strong, hirable workforce to attract potential leaseholders/tenants. If tenants avoid the area due to a lack of talent, your building's value will likely drop.
Look at market growth. Are new shops, restaurants, and apartments opening up? Is the population growing? Or is it declining with businesses closing down?
You’ll get the most value by investing in an area on the rise, rather than one that's declining.
4. Location of The Property
Choosing the right location makes all the difference in commercial real estate. See what’s around your building? Which industry dominates this area? How close is it to major cities and commuting systems?
Location significantly impacts resale value. A building in a prime spot, near a skilled workforce and eager customers, will sell for more than one far from major routes, with little foot traffic and few attractions.
The location must match the industry. For instance, a retail store near a healthcare office park or a corporate warehouse near a mall doesn’t make sense. Ensure your building’s future use complements the surrounding industries.
5. The Build Out
The build-out of your property is crucial to your commercial real estate investment’s success. Which industry should you target? Which will give you the best return on your expenses?
Sometimes, waiting until you have a buyer is smart before investing in a build-out (like in the healthcare industry). However, a build-out can boost your property’s value with minimal expense.
Simple projects that add aesthetic value include painting hallways, updating signage for better visibility, or refreshing entryways with new flooring and lighting. A beautiful entryway makes a great first impression on potential buyers and can significantly increase your return with minimal effort.
In Conclusion
In conclusion, increasing your commercial real estate ROI depends on operational efficiency, attracting desirable leaseholders, understanding demographics, choosing the right location, and smart build-outs.
Increase your property's value, appeal, and ROI with Terra Alma’s expert commercial real estate advisory in Atlanta.
FAQs
What is a good ROI on commercial real estate?
A good ROI on commercial real estate typically ranges from 6% to 12% annually, depending on location, property type, etc.
How can ROI be improved?
ROI can be improved by focusing on factors like operational efficiency, attracting desirable tenants, strategic location, and smart property enhancements.
Which commercial real estate is most profitable?
Commercial real estate in prime locations with high demand from industries like technology, healthcare, and retail tends to be the most profitable.
How does tenant desirability affect property value?
Tenant desirability significantly impacts property value, as reliable tenants who pay on time and plan to stay long-term enhance the property's profitability and resale potential.
What factors should be considered when choosing a location for commercial real estate?
These factors include demographics, market growth, proximity to major cities and commuting systems, and alignment with surrounding industries.