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How to find the perfect commercial property

Preparation is essential to ensure your first commercial property investment delivers results

May 26, 2022

Investing in commercial property can seem complex but it also offers a range of benefits including long lease terms, predefined rental increases, and higher yields. Good preparation will ensure you enter the market in the best position to secure an asset that delivers.

Commercial property includes office and retail space, industrial premises, and alternative sectors like medical buildings or data centres. Deciding which type of asset is best for you is an important first step. For a first commercial investment, Mitch Noonan, JLL’s director of capital markets for NSW says it’s a good idea to understand an asset’s usage, market, and location before you buy.

“Good location, good transport and future development potential are all things to look out for in any building, but there will also be specific desirable features depending on the type of asset,” says Noonan. “A corner profile and natural light is desirable for an office, parking or passing foot traffic might be more important for retail or medical services and for industrial premises the ease of loading and delivery matter.”

Knowing the risks

Examining the risk profile of the investment is also important. “You might find a single asset in a fantastic location but if the current tenant paying rent is not a strong business, that brings an element of risk,” says Noonan. “Similarly, if you have 15 tenants in a multi-tenanted building all on relatively short leases you might have to factor in a higher percentage of downtime, or greater incentive costs to keep those tenants.”

Good knowledge about the property’s location will give you an edge when deciding if an asset is suitable for your needs. “If you drive past a precinct every day you’ll see if it’s evolving positively or if there’s a lot of turnover,” says Noonan. “If you see there are lots of empty properties in the area, it might be a sign that it’s harder to attract tenants to the location which isn’t desirable.”

Get an expert team

Commercial property contracts are more complex than residential, and you are bound by the terms of any leases in place when you buy the building, so having a good commercial lawyer is essential during the purchasing process. “You need someone who is good at negotiating purchase contracts and can provide a detailed review of your leases, especially in a multi-tenanted building,” says Noonan.

A leasing agent can provide advice on an asset’s rental profile and a property manager can handle the day-to-day running of the building and find new tenants as needed.

Each commercial asset class offers varying returns, but Noonan says taking a multi-sector view commercial property across Sydney is delivering returns of between 4% and 5.5%. Commercial property is still attractive to lenders and outside finance is available for all asset types, but you may need a higher deposit, or pay higher interest, than with residential investment.

Plan for the future

While it’s impossible to plan for every future risk, Noonan says every commercial investor should be aware of the inflation forecast and ensure that rent increases in leases are likely to outpace it. “If predictions are for a 2% to 3% rise in inflation then you should be looking for fixed escalations in the lease of a minimum of 3.75% to 4%.

To future proof your investment further, investigate an asset’s sustainability credentials. “Sustainability is very important to consider as the commercial sector works towards net zero goals over the next few decades,” says Noonan. “Assets that have strong sustainability credentials, like 5 or 6 star energy ratings, are more sought after and more aggressively priced. This will start to flow through the private investment markets too.”

Lastly, Noonan says the best investors listen to and work with their tenants. “I’d say the biggest mistake that new commercial investors make is not reacting quickly enough to the market when tenants leave,” he says. “For example, if you start losing tenants because they’ve requested an upgrade to the lobby and you aren’t willing to do it, or they say everyone else in the market is offering a 30% incentive and you’re holding out at 20%, it might take longer to find a new tenant if they leave. Yes, investing in commercial property is about growing your income, but ideally it’s also about working collaboratively with your tenants so they grow with you.”