Richard Crenian: Investors Prefer Commercial Real Estate

18While some Canadian housing markets continue to appear to be red hot, investors are continuously leaning towards commercial real estate for a variety of reasons according to Richard Crenian.  Here are five of the drivers why investors continue to choose commercial real estate

Efficiency & Return on Investment 

Commercial properties are usually worth more money than individual homes or condos. A single family home may sell for 1 Milllion, and a local shopping plaza or office building can sell upwards of 20 Million. For investors who have the capital, this means being able to be more efficient in the investment process. There is less time, energy, and wasted dollars burned in the acquisition process. They can take down one asset, versus 20 or more, and achieve the same result. This translates into higher net returns. Individual investors can also benefit from these efficiencies of scale by partnering with others on commercial projects.

Consistency in Value

Residential real estate values as we have seen, can drastically fluctuate. While investors can generate great profits on the upswing, the losses can be even greater on the downturn. These turns are inevitable and although residential real estate is often less volatile than the stock market, the illiquidity of a slow-moving property and pose a problem for investors.

Commercial properties are valued on their income potential and performance, and are not as susceptible to major fluctuations based on neighbors defaulting on mortgage debt, or selling out cheaply. This results in more stability and liquidity.

Value Add Potential
You can make money by fixing and flipping houses, or tearing down a few homes and erecting a condo building. However, there is typically a cap on when you can make these improvements, and how high you can go. In commercial real estate there are consistent opportunities to add value. This can be accomplished in a multitude of ways including: upgrading the tenant pool and rents, through lowering expenses and improving NOI, increasing traffic and sales to a retail property, or adding additional leasable square feet. The returns on improvements to commercial property tend to be higher, and can work during any phase of the market.

Regulation & Liability

Regional banks, credit unions, funds, private lenders and family offices all understand that commercial real estate is far less risky in terms of regulation and liability, as opposed to dealing with residential homes and condos, which can be a mine field. Regardless of whether the property is leased or owner occupied, there are many legal risks which can lead to big financial losses, through no fault of the investor. Commercial investments may be regulated too, but without such exposure to frivolous legal issues.