What Type of Commercial Property is Best to Invest In?

There are many different types of commercial property to invest in, each with its own advantages and disadvantages. In fact, if you’re comparing it to residential properties, the commercial market can vary quite significantly. 

There are three main types of commercial properties you can invest in, including industrial, retail and office space. The property type you should invest in will depend on your goals and what you're looking for in a property. 

As an investor, you need to understand the unique characteristics and risks of each type of property before diving into the investment. 

So, here's a breakdown of the most popular types of commercial real estate and what you need to know about them before investing.

1. Industrial Property 

Investing in industrial property is a great way to balance your portfolio with defensive assets. In addition, factories and warehouses are always in demand as the e-commerce market continues to grow. 

They’re definitely not the most glamorous class of commercial real estate, but historically it’s a reliable performer. This is largely because most of them are let on a net lease basis, which means the tenant pays some or all of the ongoing costs such as property taxes, building insurance, water and rates, and body corporate fees. 

There are a few different types of industrial properties, including factories, warehouses, storage facilities and manufacturing plants. Each of these can also vary quite a bit in size. So, you could invest in a simple warehouse or a large storage facility. And beyond that, each property type could have multiple tenants and often contain a mix of retail and office space as well. 

So, there is quite a bit of opportunity when it comes to investing in industrial, commercial property. 

Here are a few things you should factor in when deciding whether or not to invest in industrial property: 

• Location: how close is the property to the major freeways, shipping ports and airports?

• Building access: are there roller doors? What is the internal roof height? How easily can trucks manoeuvre around?

• Fire protection: what is the building’s electrical capacity like? Is there enough ventilation? How thick is the floor, and what’s the load capacity? Is there space to dispose of dangerous materials?

• Adaptability: can the building be adapted for future tenants? And is there flexibility to include offices and showrooms? 

For more information on the benefits of investing in each particular industrial property type, make sure to check out my book Commercial Property Investing Explained Simply. 

2. Retail Property 

When most people think about investing in commercial property, they automatically think of retail property.  And for good reason. But unfortunately, it’s not uncommon to hear that retail is spending down because the online market is booming. Sure, people are spending less at large shopping centres, but local shopping strips are still an essential service. 

So, there are many types of retail properties such as medical facilities, service-based properties and general retail that are low risk and offer stable returns. 

Similar to industrial properties, the leases are commonly on a net basis for small retail centres, so they’ll pay some or all of the costs I mentioned earlier. On the other hand, larger retail centres, such as malls with lots of tenancies, will typically pay a flat rate plus a percentage of their annual sales.

Factors such as local demographics, median income levels, traffic volume, site configuration, residential and commercial density, and tenant mix all play a part in the success of retail properties - so this should be high on your radar. 

For example, traffic needs to be suitable for the type of retail centre: small neighbourhood centres can thrive on secondary roads, whereas bigger ones require a primary arterial road.

It’s also worth mentioning that retail leases have specific legislation depending on the Australian state or territory they are in. So you’d need to ensure that your lease is compliant with the relevant legislation. 

Again, I do an in-depth discussion about each type of retail space in my book, so if you’re interested, make sure to check it out. 

3. Office Space

Offices can often be confused with retail spaces – because they can, in fact, be interchangeable. Typically, a commercial property is considered an office if more than 75% of the interior is designed and finished as office space.

The reason offices are separated as a category of commercial property is that they usually require only a low-cost fit-out. Also, they’re typically used as a base where people can work from, rather than being a place where goods are produced and sold. 

Leases for office space are usually for three to five years, with tenants paying all outgoings. However, those in large buildings are usually leased on a gross basis, with the landlord being responsible for expenses.

Generally, large syndicates or investment trusts tend to purchase larger office buildings. However, smaller investors can look into buying office suits or co-working office spaces in a building for a far more affordable price. So, office investing isn’t only for the big leagues. 

Foot and road traffic are usually less important for office properties, as the types of businesses that lease them don’t rely on foot traffic, especially if they’re established. However, if the business is new or a franchise, being on the ground floor may be an advantage.

The geographical location of the office is critical; however, it needs to be in a location where there are enough workers with the expertise the business requires. 

Other factors you should consider before buying an office space investment include: 

• aesthetics of the building,

• disability access (for example, is it wheelchair friendly?)

• parking availability, 

• access to public transport, 

• proximity to amenities, 

• size and configuration of the floor plan, and 

• adaptability to meet future technology requirements. 

The biggest influence on demand for office space is the job sector, which affects rental rate growth and the construction sector. Offices usually thrive when the economy is growing, and companies are expanding. New industries can also increase demand and, therefore, growth. On the other hand, the office market struggles during flat and declining job growth.

Obviously, with the impacts of the COVID-19 pandemic, it’s become clear that physical space is becoming less important, with a shift to more flexible working arrangements and locations. So, before investing in office space, you’ll need to be aware that there has been a shift away from the more traditional use of office space to more creative uses that allow for socialising and in-person idea exploration.

So Which Property Should You Invest In?

Now, we have covered the different types of commercial property; which one should you invest in? Well, the answer to this question really depends on what your goals are as an investor.

Office, retail and industrial properties all offer different opportunities and challenges for investors. What’s important is that you do your research and understand the market before investing. 

By understanding what each type of commercial property offers, investors can make a more informed decision about where to put their money. Have you decided which type of commercial property is best for you?

If not, and you would like to know more about ​​how I have helped thousands of clients successfully source and purchase quality commercial property across the country, get in touch today.