With the changing landscape of commercial real estate, companies need to be familiar with the growing barriers in the market.
Let us take a look at some of the barriers to CRE investment:
The Financial challenge to enter the market
With large ticket sizes for investing in commercial properties, investors often refrain from investing in these properties. It is not easy to get loans from banks due to higher borrowing costs and increased cautiousness of banks due to bad debts. Also, due to a huge initial investment, investors are wary of sustaining the flow of funds for long.
Studies show that investors planning to invest in CRE are better off when they decide not to invest big in their first investment. It is advisable to invest in smaller properties. This helps new entrants understand the dynamics of managing commercial property. Office spaces are a good initial investment option as there is a growing demand for office spaces in leading cities globally. Another way to penetrate into the CRE market is through investment in a real estate investment trust(REITs). REITs give the option of limited liability and higher returns. It is easy to buy shares in a REIT scheme that invests in multiple real estate projects. This helps in increased transparency, portfolio diversification, hassle free property management and risk free investment option.
Rising interest rates
Growth in interest increases the cost of owning a property. Coupled with falling property value, the asset is likely to give poor returns. This deters investors from investing in commercial property. But investors need not worry too much about it. Historically, it has been observed that rising interest rates have actually resulted in greater returns, provided the overall economic conditions are better. An economic downturn is more likely to bring mixed sentiments and can impact the sale of the asset, leading to an overall loss. Just like any other investment, one needs to be constantly abreast of market conditions. There is always a possibility of future tax cuts which will increase asset performance.
Increasing complexities in managing commercial property
Unlike the housing segment, Commercial Real Estate requires more time and energy with multiple tenants in the building. New government regulation has increased licensing documentation and multiple lease requirements. On a daily basis, investors have to face multiple tenant concerns and align with safety compliances. Moreover, repair and maintenance of a commercial building has become increasingly challenging due to climate change and environmental damage or threats like IT security issues. This requires investors to engage professional facility management firms, resulting in an increase in cost.
Today, investors need more than just a bird’s eye view of the market. It is therefore advisable to engage CRE consultants to get an in-depth analysis of the changing CRE dynamics before making a decision of investing in small to large sized commercial properties. CRE investments require a greater investment, in terms of capital and time. Getting assistance from an expert team of CRE service providers proves useful for investors to manage a diversified investment portfolio and make informed decisions.