Is Commercial Real Estate a Good Investment?
Commercial real estate has long been viewed as a stable and lucrative investment option. As with any investment, there are pros and cons to weigh when considering commercial real estate. Looking at factors like current yields, growth projections, and risks can help assess if it may be a good fit for your investment portfolio.
Reasons to Invest in Commercial Real Estate
Healthy Yields
Compared to other investments, commercial real estate often provides relatively high yields. Prime yields on commercial property in the UK sat between 4-8% in 2024, depending on the sector. Central London offices provided the lowest yields at 4%, while shopping centres provided the highest at 8%. These yields are generally higher than bonds, savings accounts or residential real estate.
Growth Potential
The commercial property market is projected to grow over the next several years after rebounding. Investment volumes are expected to rise 12% in 2024. Rental growth is also forecast to turn positive in 2024 across most commercial property types. Investing when the market is low can allow investors to benefit from future growth.
Diversification
Commercial real estate can round out an investment portfolio, providing an asset class not tightly correlated with stocks and bonds. While past performance doesn’t guarantee future results, real estate has historically had a low correlation with other asset classes, making it a potential diversifier.
Drawbacks to Commercial Real Estate Investing
Management Challenges
Commercial properties require significant hands-on management, from maintaining the asset to finding and retaining tenants. Investors must ensure they have the time and resources for this active management role. Working with a professional property manager is an option but adds costs.
Lack of Liquidity
Commercial real estate is one of the least liquid investment assets, meaning it can’t be quickly bought and sold. Depending on market conditions, it may take months to sell a property. Investors need to be prepared to hold commercial assets for the medium to long term.
Risk Exposure
Income generated by commercial real estate relies heavily on the tenants and overall economy. Market downturns and tenant bankruptcies can quickly leave vacancies and reduce returns. Geography also comes into play, with some markets carrying higher risk than others.
Is it the Right Time to Invest?
Current industry trends point to a recovering commercial real estate market after a challenging couple of years. Investor confidence and appetite for risk is on the rise. However, some factors suggest a measured approach may still be prudent.
Interest rates are expected to continue dropping slowly, which will help improve investment activity. But the cost of borrowing remains relatively high.
The Importance of Taking Professional Advice Pre-Acquisition
Be prepared to invest in legal and financial advice. A commercial building survey is a must-have, for example, as a commercial building condition survey will reveal any hidden faults.
As with any investment, thorough research and risk assessment is key before putting capital into commercial real estate. For investors with the resources and risk tolerance, it can be an attractive component of a diversified portfolio. But potential downsides need to be weighed against the opportunities.
