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Buying A Commercial Property?

November 20, 2022

Buying A Commercial Property And What To Look For

Office space is typically referred to as "commercial."

Commercial properties make good investments because they provide consistent cash flows and a relatively stable income.

You should be guaranteed of capital growth if you choose a commercial property in a desirable location. Even though you may not currently be in that league, you should still be aware of and understand the fundamentals because you never know when you might be.

The success of a commercial office building depends on both the location and the building, just like other real estate investments. Only pick "smart" buildings with the newest technology in prime locations. Never sign a contract without first consulting an attorney.

Tenant selection

Tenant selection is crucial, just like with any investment. As a landlord, you should establish standards for general cleanliness outside the building and the disposal of waste, even though you cannot impose as stringent requirements on the cleanliness of the premises as you would for residential or office tenancies.

selection of a tenant

Large office spaces command greater rents than open warehouses do. Commercial leases typically last three years and are updated annually to reflect changes in the CPI. Compared to office buildings, light commercial buildings can be built quickly and with reasonable ease.

Rents and occupancy rates often increase gradually and steadily during expansionary economic times and decrease significantly during depressed times, but on the whole, the industrial market is less volatile than other markets for commercial real estate.

purchase of office space

Take into account the following elements when searching for the perfect commercial investment:

Good location, as many businesses need their staff to have access to roads and major population centres.
sufficient on-site parking for both guests and employees.
sufficient access for vans and trucks. As a result, the warehouse's entrance must be higher, and the access roads cannot have a severe incline.
Good employee amenities, including bathrooms, kitchens, and offices with air conditioning.
Allowing for the possibility of on-site offices and showrooms
Large roof heights are necessary since many tenants employ contemporary shelving to put their items higher.

Getting started in the commercial real estate sector
The commercial market can be entered in a number of ways.
These often demand greater financial resources than a residential property and include:
The construction of a new building is done via the real estate market.
The best course of action would be to plan it for a known end user who requires the office space.

Repurpose an existing structure for use as offices or update an outdated office building.
Purchase a section of a larger structure that is listed on a strata title as an office building; or purchase a structure that is already occupied by tenants on a lease basis.
occupants of offices

Selecting a tenant for your office building is crucial, just like with any other investment, as careful selection will serve as the foundation for your ongoing income.

The good news is that the service sector in Australia is expanding quickly, and despite the trend toward working remotely or abroad, there is a constant need for appropriate office space.

Tenants with a solid business history or those operating in industries with room for expansion are the most sought-after.
Over the years, lawyers and accountants have demonstrated a high degree of consistency, and they have earned the public's trust and respect.

Office space is typically leased for a period of three to five years, with the tenant responsible for covering all expenses, frequently including manager fees.
For the first three years, rents can either be fixed or subject to yearly increases based on the consumer price index.
The market rent typically changes at the conclusion of the initial lease term.

commercial lawyer

qualities of an office building qualities of an office building

Smaller investors still have access to office building purchases, though most office building investments are made by large consortia, institutions, or investment funds.

Office buildings come in a variety of sizes, from modest suburban structures to enormous, towering structures in city centres.
Office buildings are typically divided into classes according to their age, location, and facility quality.

cornice work

Typically, three types of office space are distinguished.

Class A buildings are the most coveted because they are distinguished by high-end features and amenities and give their occupants high status.
Typically, Class B buildings are older, once-Class A structures that are now devoid of contemporary amenities and technological features.
Due to their economic viability, they are typically leased at lower rents and are appealing to smaller tenants.
Class C structures are frequently more aged and have not kept up with trends. Older structures can occasionally be renovated to regain their Class B or A status.

Parking zone features and amenities

Parking or, if the building is situated in the city center, accessibility to public transportation for residents and clients, are two essential features of an office building that tenants demand.

Tenants of office buildings also want easy access to banks, dining establishments, and other amenities for client entertaining or lunch. As a result, there are now restaurants and shopping areas in a lot of big office buildings to satisfy the needs of tenants.

In order to avoid restricting visitor access to these buildings to side streets or backyards, suburban office buildings should be situated close to major thoroughfares like highways. Tenants frequently calculate the ratio of the area allotted to each employee when searching for office space. In the past, shared restrooms, hallways, and an average of 25 m2 were allotted to employees.

Although the amount of space needed varies greatly by industry, the average employee space requirement is now only 15 m2.

Tips for building wealth through commercial real estate

1. Due diligence and market research and understanding the market

Research everything, from the broad strokes (economic projections and vacancy rates) to the finer points, like walking the neighbourhood and speaking with brokers to learn about rental rates there. Examine the state of the economy in the area you want your tenant to come from, as well as any changes to the infrastructure and future plans for the region from the local and state governments. Hire a business attorney who can give you advice on leases or conveyancing.

2. Invest in prime locations

Always invest in prime retail, commercial or industrial locations - positions with high demand popular with tenants and buyers.
Consider visibility, access to public transport and parking.

3.Buy a rented property

When you start investing in commercial property, reduce your risks by buying a property that is already let to a good tenant with a long lease.

4. Quality of the tenant and term of the lease.

Since the value of your commercial investment depends on the rental yield, a good tenant with a long lease (at least five years) is the basis for a good investment. Check the rent per square metre and make sure it is not excessive compared to market rents.
If the rent in your lease is $500 per sq ft and the market rent is $700 per sq ft, then there is upside potential in the following rent review.

If the current rent is above the market rent, you may be paying too much for the property and have little upside potential at the rent review and, therefore, a higher capital value.

5. Structure of the leaseĀ 

This includes the length of the commercial lease, the frequency and arrangements for rent reviews and who pays the running costs.
It would be better to have a long lease with regular rent adjustments to the market with a minimum CPI increase and a tenant who bears all the costs.

6. Newer construction

In general, newly built commercial properties are more attractive to tenants and require minor renovation. They also have higher depreciation benefits.

7. Flexible design

This means that you will not be faced with an inefficient layout when subletting. For industrial buildings, this means that the proportion of office space can be easily varied.

8. Invest in properties with development potential.

Look for undercapitalised propertiesā€”those where tenants are paying below-market rent or those that are underdeveloped.

Now is the time to take advantage of the opportunities that the current real estate markets offer.
Get in touch with Ryder Lawyers - Commercial Property Lawyers

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