Commercial real estate investment has the potential to be a lucrative source of income, with returns averaging 6-12% annually. Despite these attractive returns, there’s a lot you need to know to become a successful investor. It’s a journey that can be fraught with challenges and pitfalls.
Today’s technology is here to help. These days, there are several Geographic Information Systems (GIS) property intelligence tools available online, many of them user-friendly and accessible to even beginner commercial real estate investors.
GIS is a spatial mapping tool, similar to Google Maps, but with a treasure trove of information available at the click of a button.
An online GIS platform is one of the best (and easiest) ways to access detailed property information, demographic data, consumer trends, and analytics – everything you need to know to help you make smart investment decisions.
Which Sector of Commercial Real Estate Should You Invest in?
When choosing a commercial real estate investment, it's wise to take a long-term view.
Different sectors are expected to perform differently in the coming years, with some expected to rebound while others may take longer to recover.
Here's how different sectors of commercial real estate are expected to perform:
Retail Stores
The Covid-19 pandemic devastated many retailers, with many going bankrupt because of decreased footfall due to people preferring to shop online. This trend is continuing which is causing a number of retail stores to close their doors. Experts are predicting that retail stores in urban spots, like New York and San Francisco, will be replaced with healthcare, grocery, and other alternative stores.
Offices
The shift to hybrid work may help alleviate some of the stress on the office sector, which has seen a 15% decrease in demand due to work-from-home, according to CBRE.
Hotels
Experts reckon that travel accommodation won’t recover until at least 2023, although it may take until 2025 for the industry to fully recuperate.
Warehouses
Warehouses will be star performers in commercial real estate markets due to the increasing demand for e-commerce.
Apartments
Even though many people struggled to pay rent during the pandemic, there is an increase in demand for homes, especially multi-family properties. This is due to lower loan rates and more affordable prices.
Rental Property Upgrades
Multifamily property owners may see an increase in requests for bigger apartments and upgraded units as tenants adjust to work-from-home lifestyles.
Commercial Development
It is worth investigating new development opportunities that may arise in this sector.
Tips for New Commercial Real Estate Investors and the Role of GIS
To succeed in commercial real estate investment, it's crucial to understand the market, evaluate risks and rewards, and do thorough research. GIS analytics platforms can be very useful in this process. These key pointers will help you get started.
1. Understand the Characteristics of Commercial Real Estate
When looking at investing, it’s important to remember that commercial real estate is related to, and valued according to, space; not, as with residential property, to units. Since the lease periods are typically longer than with residential properties, there is bigger potential to earn higher income.
When calculating demand, two elements go hand-in-hand: the location and the planned tenant type.
A corporate office building, for instance, will probably function better in a business district than in a predominantly residential neighborhood. It may well be a cliché but the adage of “location, location, location!” still rings true.
Commercial real estate has several advantages over residential real estate:
- It can generate profit/income
- It has a larger footprint than residential real estate
- It offers the chance of capital appreciation for investors
- It has longer-term lease periods than residential property
- There is less competition because this space is perceived to be a difficult investment
2. Do your Research Using GIS Analytics Tools
It’s important to put in the legwork to research, analyze, and understand the trends surrounding the locations of your commercial real estate investments, as knowing these will help you make wise decisions.
Smart commercial real estate investors focus on two main areas of research:
- Knowing their ideal buyer
- Knowing their business location (and the market decisions surrounding it)
Using a GIS analytics platform can help you really get to grips with desired locations, the demographics of the buyers in the area, the type of tenant mix available to you, and so much more.
You can get information about commercial properties, including occupancy rates and average rent prices, which will help you understand what’s happening in a certain area. You can also see what other businesses are operational in the area, and analyze how they may impact your investment.
3. Use the Right Success Metrics
Investing in commercial real estate requires a thorough knowledge of real estate financing. There are various formulas you need to be familiar with to compete in the CRE market, such as:
- Net operating income: The amount you’ll make before tax and after operating costs.
- Capitalization rate (or cap rate): Calculated to determine the value of income-producing properties, giving investors a glimpse of future profits and cash flow.
- Cash-on-cash return: Gives investors a rate of return on their commercial real estate transactions, often used by investors who rely on financing to purchase their properties.
Here’s a handy calculator.
4. Identify Competitors and Analyze Comparables
To weigh up the pros and cons of the investments on the table, it’s helpful to be able to run comparisons. Using a GIS tool, you can see what businesses are already operating in the area you’re considering and what kind of services they offer. This information will help you determine if there's room for your investment property and if it's the right fit for the area. Most GIS platforms allow you to do comprehensive market void analysis quickly and easily.
Property value plays a big role in the investment decision-making process. You’ll need to research the area to find out how much similar properties are worth, how big they are and what the general style of the area is. GIS property intelligence platforms usually have this information available too.
5. Analyze Foot Traffic and Spending Patterns
While we’ve already mentioned the importance of researching your customers and mining demographic data, another layer of data which is particularly useful for retail property investors is foot traffic. A good GIS analytics tool gives you access to foot traffic data and spending patterns for your chosen area. You can view the number of people visiting the location, their demographics, nd what they're spending their money on. This will give you an indication of whether it could be a profitable location for your business.
6. Evaluate Potential Rental Income
Commercial real estate investors look for properties that will generate a steady income from leasing. GIS analytics can provide you with data about the average rental prices in the area, allowing you to determine the potential rental income from your investment.
Commercial Real Estate Investing Mistakes to Avoid
When it comes to commercial real estate investment, knowing what NOT to do is just as valuable as knowing what to do.
Some of the pitfalls that you should be aware of include:
- Failing to do thorough research on the local real estate market and the properties you're considering investing in
- Investing in the wrong location, such as an area with declining population or economic conditions
- Neglecting to properly evaluate the financials of a property, including the rent roll and expenses
- Not doing a thorough due diligence
- Not having a clear investment strategy and ignoring the potential risks involved
- Ignoring the competition
These mistakes can usually be avoided by working with an experienced broker in your sector of investment.
Most GIS platforms are accessible to anyone with a bit of know-how, so there’s certainly no need to take shortcuts when it comes to research and understanding the market.
Final Thoughts on Commercial Real Estate Investing Using GIS
GIS analytics can be a powerful tool for commercial real estate investors, allowing them to make informed investment decisions and avoid common mistakes.
Whether you’re a beginner or an experienced investor, understanding the key features of GIS analytics and how they can help you make smart investments will put you ahead of the competition.
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