Evaluating Commercial Properties: 6 Things to Look for Before Investing

Looking for commercial spaces available for rent? Whether it’s an office, a retail space, or a warehouse, buying a commercial property can be a lucrative and rewarding venture. However, it can also be a risky and complex one—especially if you don’t know what to look for.

To help you out, we spoke to real estate experts to develop six tips on how to evaluate commercial properties before investing. Read on for all the details. 

Market conditions

Factors such as rental growth, vacancy rates, and capital appreciation all affect the supply and demand of commercial properties in your area. 

Research current market conditions and likely future trends to make an informed decision on whether or not to invest. Start by looking up occupancy rates, rental rates, and industry outlooks for comparable properties in the area.

Property history

Look at the present condition and past performance of the property you’re considering. This information will be pivotal, helping you weigh the potential risks and opportunities. 

Assess the present condition by inspecting the property physically and learning about maintenance costs, depreciation benefits, and any legal or environmental issues. Learn about past performance by reviewing property records, occupancy rates, tenant turnover, and any repair history.

Income potential

Consider the income potential of the commercial property. How much could you earn from renting or selling it? This will help determine if it presents a favorable return on investment and if it’s attractive to tenants and buyers. 

To estimate the potential value of a property, use the income approach to see how much income it might generate. Divide the net operating income (NOI) of the collected rent by the capitalization rate (aka the expected rate of return) on the property. For example, if the NOI is $1,000,000 and the capitalization rate is 8%, then the property value is $12.5 million.

Tenant market

The tenant market is your target market for commercial properties, so consider what kind of tenants you want to attract. This will help determine rental incomes, lease terms, and tenant quality, bringing a sense of stability to the property.

Look at creditworthiness, lease duration, and rent escalation to determine appropriate rental incomes and lease terms. In addition, identify the kind of tenant profiles and tenant mix you’d need to achieve steady income while staying in line with market demand.

Location and accessibility

The “location, location, location” mantra of residential properties applies equally well to commercial properties. Consider where your property is located and whether it’s easy for tenants, customers, and suppliers to access it. 

A great location with easy access will help you grow your target market and expand your potential income. To see if your property fits into that category, analyze demographics, traffic, infrastructure, and other amenities in your area. Then, compare that data with the needs and preferences of potential tenants and customers.

Financing and taxes

It’s essential to know your financing options and tax implications before investing in any commercial property. This will help you determine whether it’s truly feasible and whether any tax benefits might come with the property.

To start, explore all the different financing options and tax structures available to you. Compare the options, looking at interest rates, fees, terms, and conditions. You can do this yourself or reach out to business tax accountants to get expert guidance through all the complex details. 

Investing in commercial properties is a great way to build and diversify your portfolio. That being said, it comes with formidable risks. By paying attention to market conditions, property history, income potential, tenant markets, location, and financing, you can mitigate those risks and make more informed investment decisions.