Commercial real estate has always been a popular investment option for businesses. Not only can it provide a working space for its employees, but it can support a long-term investment strategy for financial growth. The market, however, has been unstable due to the economic challenges brought on by the Covid-19 pandemic. From 2020-2021, real estate prices plummeted to a record low, while this past year the costs have risen significantly alongside national inflation. Many are left wondering, is now a good time to invest in commercial property? Is now a better time to sell commercial property? We’ll explore the factors that are impacting the current market as well as the risks associated with buying and selling.
Why are Businesses Wanting to Buy Commercial Real Estate?
During the Covid-19 pandemic, the world went almost fully remote- with more than 70% of the workforce working from home. This drastically changed the need for commercial real estate, and the desire to pay for space that was no longer being used. For many, it was cheaper at the time to rent a co-working space for occasional meet-ups rather than pay a full lease or mortgage. Many businesses sold their offices or downsized to support a hybrid model of working. Today, while a good number of businesses still operate in a predominantly remote model, most businesses are returning to the office full or part-time. Around 90% of businesses currently support a hybrid model, and close to 50% expect to return to the office full-time in the next few years.
This creates a new opportunity for companies who want permanent office space again, or who are looking to purchase with the intent to rent to others. The returning desire to return to the office increases the value these properties could bring to businesses in the long term. In general, it's a good idea for businesses to buy if:
- Their finances are stable
- Their customer base is predominantly in the geographical location of the property
- The company is looking for an asset that will appreciate over time
- The company is looking to generate passive income through rental services
While a lot of businesses have the desire to buy a property, that doesn’t mean it’s always a good idea. Some businesses may be better suited to renting a co-working space or keeping their operations predominantly remote. In general, it's a good idea to rent instead of buying if:
- Finances fluctuate
- The customer base could potentially change
- The business is unsure of long-term needs for a property
- The business can’t afford an ideal location for foot traffic
It may not be the thriving market it tends to be, but some businesses are looking to sell anyways. Whether your businesses model has changed or you’re selling for financial purposes, it's generally a good idea to sell right now if:
- You are not in a rush to find a buyer and don’t mind your listing being on the market for some time
- You are comfortable listing at a competitive price to offset the interest rates
- You have a smaller unit sized for retail stores or similar occupancy
Whether or not you’re wanting to buy, it's important to consider all of these factors when actually deciding on moving forward with the purchase.
Is the Current Market Good for Buying?
Commercial real estate markets are influenced by factors like interest rates, economic conditions, valuation rates, and supply and demand. The residential housing market has been volatile over the past year and has raised concerns for potential commercial buyers. Luckily, commercial property is historically much more stable than residential, and even during some of the worst residential markets, the commercial was stable.
2023 presents an interesting market, where there is a lot of opportunity and a lot of potential downsized as well. The first factor to consider is interest rates. In 2022, interest rates rose significantly and the commercial real estate market saw a slowdown in purchases. Commercial mortgage rates doubled from the 3% range to the 6% range, and lenders are requiring more equity and reducing the borrower’s leveraged returns.
The second factor to consider is supply and demand, which is benefiting from interest rate hikes. Since purchases have slowed down and so many are delaying buying until rates decrease, there are excess properties available. There are also higher-quality properties available at lower prices since sellers know the monthly costs will be impacted by interest rates.
The third factor to consider is the economy. The US has been teetering on a recession for months, and the overall cost of living continues to increase. Buyers are waiting for interest rates to go down but when looking at the future forecast of the economy, yet, it's likely that they will only continue to increase. That means the interest right now could be the lowest interest for the next few years, making now the optimal time to buy. Additionally, if the forecast is wrong and interest rates do decrease, buyers can refinance their debts to account for the lower rates later on. Essentially, taking the risk of buying now means potentially securing a lower interest rate for the high-value property, or refinancing in the future when rates drop.
Should Your Business Take the Risk?
If your business is really looking to invest in real estate, now is a good time under certain circumstances. With interest rates higher and more equity required, consider whether your business can afford to pay more upfront. If you are financially unstable or predict a decrease in revenue in the near future, it might be best to hold off. However, any business that is stable and can afford upfront costs could benefit in the long run. Analyzing your cash flow and predicted financial health for the next few years can help determine if you’re in a good position to buy. The important takeaway is that the factors will prove different for every business. There is less competition in the market, making it an ideal time to secure more desirable properties. So, for some, it's a great time, for others - it’s best to wait. Some businesses would benefit from never buying, it’s all relative to the business, its operations, and their long-term goals.
Protecting Your Commercial Property
If you do decide to purchase a commercial property, or already own one, it's important to have insurance coverage to help manage your risk. Commercial property insurance will protect your company’s physical assets, including the building itself and anything housed within. Commercial property is an imperative aspect of business operations, and any damage to the building could pose a severe financial and operational threat to your business. With the costs of owning a property so high, most can’t afford the added burden of damage repair.
ECBM can help build your commercial property insurance program to ensure all potential risks are covered at adequate limits. Our team can analyze your full business insurance plan and optimize your risk management program. For more information on our services, contact one of our agents.
