What type of Commercial Property is best?
What type of Commercial Property is best?
This is the question I’m frequently asked when I meet someone who is considering buying a commercial property in Florida. What I like to do is go over the chart below with new clients. For some clients who own multiple commercial properties, this is old hat. For newer investors, this is a really good starting point. This chart is by no means all inclusive as there are many holes in it. That being said, it’s the most effective overview I can come up with that presents property types in a concise manner. I’ll summarize my thoughts on this chart below.
Land: Land can be as complicated, or as simple as you’d like it to be. Land banking is when you buy a piece of land, and literally do nothing with it. You just sit and let it collect value. You can look at doing a lot split, which is when you do something like buy 10 acres of land, and split it into 5 parcels of 2 acres a piece. In an ideal world you try to retain 1 or 2 of the parcels as profit. Getting into the more complicated strategies there’s rezoning and development. I would tend to reserve these strategies for more seasoned investors.
Industrial: Industrial has been the darling asset class the last couple years, and with good reason. Personally, its one of my most favorite asset classes. Limited management responsibilities, not much a Tenant can do to hurt the property, constricted supply (not a lot of towns want more industrial, but contractors always need space to hold materials and park trucks), and upside on rental rates. Small bay, flex, and warehouse spacing are the easiest entry points. The product is straightforward and easy to understand. You can throw in IOS or Industrial Outdoor Storage as another segment of Industrial that’s easy to understand, and provides flexibility (you can build a structure down on the line on the land should you choose). Manufacturing, intramodal, and omni channel are the more difficult product types within Industrial.
Retail: When I’m asked about Retail it’s most often from someone that is asking me about NNN (triple net), or mailbox money properties. The term mailbox money comes from the notion that each month the money just appears in your mailbox. These are typically long term leases by nationally known brands. The Lease structure passes costs onto the Tenant, leaving the Landlord with little to manage (on most deals just the roof and structure). There has been a proliferation of Landlords trying to adapt this structure to small and local Tenants. I could have a whole discussion on this, but if a Tenant is not a credit Tenant, trying to force them into a net Lease will often end badly. Restaurant or Quick Service Restaurants (QSR) have been a real bright spot since Covid. You also have strip centers and free standing retail buildings you can invest in. You have to consider traffic counts and patterns, demographics, and parking among other things when evaluating a site. For those looking for more upside go dark, or vacant locations can often be real winners.
Office: When you think of professional office think of a high rise filled with bankers, doctors, and lawyers and such (credit to Waylon Jennings & Willie Nelson). Medical has it’s own niche. You also have small office structures, if you’re familiar with Regus it would be something like this. While I can give you the basics of Office properties, it’s not something I transact in so I would have to refer you out, unless it’s a special circumstance.
Multifamily: The last several years there’s been a rush into multifamily, which has caused massive cap rate compression. There was, and you can argue still is, no tighter trade than a value add multifamily deal. This is where someone wants to come in and renovate an older multifamily property, raise the rents, and expand their cap rate. There’s a lot of money chasing these deals. Multifamily is the most management intensive. Property managers take a hefty fee on multifamily management because it is, quite literally, a full time job dealing with it. That being said, it’s a common starting point for those who want to begin investing in Commercial Real Estate. A Net Leased product is pretty straightforward when you’re underwriting it. Multifamily has a lot more moving pieces. Two investors will likely underwrite the same property differently. One investor may want to self manage and set aside a nominal amount for repairs and replacement, another may hire a management company and set aside hefty reserves for repairs. Their pro forma cap rates will look drastically different.
Specialty: Gas Stations, Hotels, Marina’s, Self Storage, these are just a few specialty type properties within the Commercial Real Estate world. In order to buy these you have to not only understand the real estate you are buying, but also that business that comes with that Real Estate. As the name suggests these are specialty products, they’re best left to a real estate agent who specializes in these sub categories. I am not one of those. If you’re interested in a product like this, this is something I would refer out.
I hope this overview gives you some context, and maybe allows you to consider, or eliminate some product types from your search. This is just a very general and broad overview and is filled with limitations. Want to talk some more? Just call me, my cell is (786)443-7203. Too shy to call? You can email me, casey@caseycre.com.
