Factors to Consider Before Buying a Commercial Property

Factors to Consider Before Buying a Commercial Property

Because it’s much harder to find commercial tenants than residential ones, and because the sector is more exposed to changes in the economy, buying a property which already has a commercially successful tenant on a long-term lease is the holy grail of commercial property investment.

If you have a reliable tenant in place, you’ll enjoy greater cash flow benefits and rental certainty, and face fewer ongoing expenses, than you would if you stuck to residential property investment. But while it’s arguably the most important, it’s not the only factor you need to consider.

  1. The lease and the tenant
    For reasons we’ve already explained, the lease and tenant are the first things you should look at when evaluating the viability of an investment.

Widely regarded as “blue-chip” tenants, corporate or government entities are the most sought-after, as their superior financial resources mean they’re less likely to default on their rent. But they’re far from the only desirable tenants.

What you’re after is a business that matches the location and operates in a sector with strong long-term prospects (think technology and health rather than traditional retail and manufacturing).

Ideally, the property will already come with a tenant – one which has recently signed a long-term lease with built-in annual rent increases. But if the property is vacant, you need to make sure that it ticks enough boxes to attract valuable suitors – a task which the points below offer some insight into conducting.

  1. The state of the economy
    Commercial tenants are more vulnerable to economic shocks than residential tenants, as while people always need a place to live, demand for products and services is far more elastic.

Consequently, everything from consumer spending to technological disruption affects demand for commercial property, which means a slight economic shock could make it hard for you to find a tenant.

And so, you should stay abreast of important economic developments to ensure you choose a tenant that pays the rent on time comfortably.

  1. The location
    As with residential properties, location plays an important role in determining the value of commercial property. The only difference is in what’s included on the list of desirable amenities.

For example, if you’re considering buying a warehouse, you’ll want a site that is close to major roads, airports and ports, as close proximity to major transport hubs facilitates the transportation of goods.

On the other hand, if you buy a retail store, you’ll need to take into account the demographics of the area before choosing a tenant. If the business’s target market is poorly represented among the local community, then perhaps you’d be better off bringing in another business.

Similarly, if the local area is saturated with a certain commercial property type, it’s often advisable to broaden your search, as an oversupply of similar properties will make it difficult for you to secure a reliable tenant on a long-term lease.

  1. Planned infrastructure and supply changes
    When assessing the location and strength of the local market, it’s important to look towards the future, as what may look like a strong business proposition today may descend into a loss-making venture tomorrow.

For example, if there are plenty of infrastructure projects in the pipeline on the other side of town, you might want to reconsider buying a property on this side, as you may struggle to convince businesses to move into your property when they could move into one that’s closer to the improved infrastructure.

On the other hand, if the suburb in which you’re considering buying a property will soon be awash with new projects, property prices will likely rise in the near future, and so it might be worth bringing forward your purchase to avoid playing an inflated price.

And it’s important to keep an eye on future developments, too. For example, if plenty of similar properties are scheduled to hit the market at the same time in the nearby future, you may struggle to secure a reliable tenant amid the increased competition, even if the property ticks all other boxes in today’s market.

  1. The property itself
    Last but not least is the quality of the building itself. Make sure the property has a layout that is suitable to the businesses you hope to attract and that the bones of the building are in good health.

As enticing as the cashflow opportunities and favourable lease structure may be, don’t let a desirable location and deep pipeline of infrastructure projects trick you into paying more than a property’s worth. Be sure to compare the property’s asking price with others on the market, and be prepared to negotiate for a much lower price if the building is in serious disrepair. If a suburb has a deep pipeline of infrastructure projects, bringing forward your purchase could help you avoid paying an inflated price. 

What factors affect demand for commercial property?

While the section above provides an insight into the decisions you’ll need to make when weighing up one potential investment against another, the factors below are more concerned with the developments that affect demand within the sector as a whole.
  1. Interest rates
    Attempting to predict the Reserve Bank of Australia’s next interest rate move is almost as popular a national pastime as having a drink or watching the cricket. And for good reason: rates affect pretty much every aspect of the economy.

Low interest rates make it cheaper to borrow money, which increases demand for commercial property and boosts prices. Conversely, high interest rates make money more expensive, which leads to less demand and higher prices.

  1. Demographics
    The average age of a population has a major impact on demand for goods and services, which, in turn, affects demand for commercial properties.

A combination of declining birth rates and increased life expectancies mean that Australia’s average age is currently on the ascendancy. Which, among other things, means that demand for aged care facilities and health centres is on the rise.

  1. Population growth
    High population growth leads to increased demand for goods and services, which, in turn, results in increased demand for commercial property.

Of course, population growth is not experienced evenly across the country, and so it’s important to pay attention to the direction of these migrant flows to leverage the benefits they represent.  Demographic shifts, population growth and interest rates all have an impact on demand for commercial property.