Every investment will require a degree of uncertainty, but it is possible to capitalize on the growth of your portfolio by configuring it to distribute risk in a way that you are comfortable with, yet maximizes returns. It is firstly important to accept that not all commercial properties will increase in value and therefore, harnessing the cyclic performance of real estate is essential to managing your portfolio along with strategies that determine when to enter and exit the market.
The surrounding land and its function may impact upon the growth of your adjoining or nearby commercial property. As areas develop, are rezoned and become busier (or perhaps the opposite), keep an eye out for what is happening in the immediate and local area to ascertain whether your property will be affected by changes that occur outside of your title. This could mean keeping an eye on comparable sales that indicate an upward or downward trend of your property value, or more subtle signs such as a changing demographic like more families or young professionals moving to the area. Of course, a strong indication that values will increase is when there is substantial investment in local amenities and infrastructure such as roads, public transport, purpose built retail and hospitality precincts and professional services such as doctors and dentists.
Another factor to keep an eye out when seeking properties that will undergo substantial, or even just steady, capital growth is to follow industry itself. If you are considering or currently own a commercial property suited for a specific purpose or profession, review where this profession is largely operating already. This may indicate where a commercial hotspot is either thriving already or perhaps is a location in need of expansion, or even relocation, as rents become more expensive.
Therefore, knowing the state of the industry or type of clients your commercial property would most likely attract and what they are doing, will inform your decisions surrounding whether it is time to enter or exit the market to maximize growth or avoid asset depreciation. For example, as inner city rents drive some corporate headquarters and public sector offices out of central business districts, commercial properties in the regions where they are relocating are experiencing regeneration or are being built anew. In this instance, commercial growth is directly linked to relocations as jobs move away from major urban centers and require office space. Similarly, announcements relating to high-density living or new, substantial residential developments will also support the development of commercial property, so look for growth in the former to indicate increases in the latter.
The valuation of your property is, of course, market-based so having an understanding of what is happening in similar and immediate areas will allow you to gauge if and when growth may start occurring and perhaps even on what type of trajectory. Generally speaking, the economic climate for commercial investors is steadied or grown in tandem with circumstances that foster development, with residential and infrastructure projects playing a role in supporting the value of commercial properties.
Growth may also come in various forms for your property. The land on which your property is built is one that is highly significant when valuing your commercial property. Even in a strata investment within an office complex, the ground upon which it is built is a fundamental aspect of your property’s value. Therefore, you may be able to predict when your property will increase in value firstly when land in the area is becoming more developed and secondly, there becomes a scarcity of plots available for commercial development or redevelopment. Supply and demand in this instance will work in your favor if you have already purchased your property, bonus points if you own a plot that can be subdivided or developed into strata investments, or simply leased to multiple tenants.
Another way in which you can forecast growth in commercial property is to examine its ability to function as an income asset. With reliable, long term tenants and secure lease options attached to a property, predictable income that is contracted and regularly received as per the terms of a rental agreement will grow via periodic rent increases. Furthermore, properties that exhibit potential to increase their tenancy capacity will also enable you to predict growth via increased revenue and revenue may also be grown via larger rental increases if commercial spaces are less available but in demand within particular areas.
Understanding trends within the commercial property sector will also enable you to accurately determine where growth can occur. Firstly, the recent rise of pop-ups rentals can mean a series of short-term leases can be squeezed into one space successively or seasonally. This means more rent for the commercial property owner that may be in between longer term tenancies, or flexible leasing commitments prior to a property’s sale or redevelopment. Suitable properties in areas that are known for pop-up retail outlets, for example, can expect growth from this type of arrangement.
Another buzzword making the rounds within the commercial property is the use of spaceless growth, whereby more is done within the floorplan of an existing area. Whether it be hot desking, redesigning office floor plans, moving to cloud-based storage or building shared workspaces over individuals offices or cubicles, when you can maximize efficiency to offer ‘more’ capacity, the growth of a commercial property will increase.
Finally, keep an eye on the residential property market. As housing prices rise and density increases in already popular areas, even a simple boost in foot traffic can mean the growth of commercial property will most likely follow. As new businesses seek premises to operate out of to cater to wealthy, or simply more, residents in popular areas, again commercial leases may witness a boost as demand tightens and gentrification of a neighborhood occurs, driving prices for goods and services upwards. Previously industrial areas may also experience significant growth via rezoning to make way for large residential complexes, so look out for these opportunities also.