Understanding the Region You’re Buying in is Crucial
Detailed due diligence is critical when buying a commercial investment property. One of the key elements of due diligence is understanding the region where the property is located. Each region has its own unique market conditions that can impact profitability.
For example, a store in a massive shopping mall in the city centre may be more profitable than a property in a rural area because there is more demand for space in the city.
Knowing things like the local economy, demographics, and infrastructure can help you make an informed decision about which property to buy. Without this knowledge, it would be difficult to determine if the property is likely to be profitable.
So, here are a few things to keep in mind when conducting area research before buying your next commercial investment property.
Region Research
When researching a commercial property, it is important to gather information about the local area. This includes demographics, economic indicators, and infrastructure. By understanding the area around the property, you can get a better sense of its potential future value.
Demographics can give you an idea of the population size and growth rate, as well as the age, income, and education level of residents. Economic indicators can provide insight into the overall health of the local economy as well as specific industries that are booming or struggling.
Infrastructure refers to the roads, bridges, and other public works in an area that can impact the ease with which goods and services can be transported to and from a property.
It’s also worth noting that town planners can be an invaluable resource of information when conducting this type of research. They can provide insights into things like population growth trends, future development plans, and traffic patterns.
This knowledge can help you make informed decisions about which properties are likely to deliver the best return on your investment.
The Property’s Location
When it comes to commercial real estate, location is everything. That's why, before making a purchase, it's important to do your research and make sure that the property you're interested in is situated in a prime location. Things to consider include access to the building, street exposure, and opportunity for business growth.
Is there a mix of complementary neighbouring businesses? Are there anchor tenants nearby to keep the area in demand? How are the neighbouring businesses doing?
Answering these questions will give you a good idea of whether or not the property you're considering is a wise investment.
Comparable Sales and Rentals in the Area
Beyond region and location, you'll also want to look into the overall market in the area and how the property you're interested in compares to others.
Checking recent sales and cap rates can give you an idea of where the market is heading and what similar properties are going for. It's also a good idea to look at lease lengths for comparable properties.
This will give you an idea of how long you can expect tenants to stay and how easy it will be to fill any vacancies.
Vacancy Periods
When you're scoping out commercial real estate, it's important to take the vacancy rate into account. This will give you a good idea of the demand for the style of property you're interested in.
You can speak with property managers to get a better sense of what the market is like and look at historical occupancy rates to see how demand has changed over time. Keep in mind that vacancy rates can fluctuate, so it's important to stay up-to-date on the latest trends.
Zoning and Overlays
Zoning and overlays are the next aspects of a property’s location to consider. In Australia, all land has a designated zone type that permits certain kinds of activity. For example, zoning can determine if you’re allowed to change the exterior of a shopfront, put advertising signs on the building, change its internal fit-out, or put in telecommunication devices.
The four main types of zones are residential, commercial, industrial, and community. Some activities are prohibited in all zones, while others are only allowed with a permit or development approval. Zoning is set by local councils in their planning schemes and can be changed through amendments.
Overlays are an extra layer of controls that are placed on top of the zoning and are also shown in planning schemes. They might apply to all properties in an area or just specific ones, and can affect what development is allowed on a property.
For example, an overlay might control the height of buildings, address flooding or bushfire risk, or designate an area as being of archaeological significance.
When looking at a property, it’s important to check what zone it’s in and whether there are any overlays that might restrict development. This information is available from the local council or planning authority.
Key Takeaways
When considering the purchase of a commercial investment property, it is essential to conduct thorough due diligence in order to minimise the risks involved. One important aspect of due diligence is area research.
This involves investigating the surrounding neighbourhood in order to gain an understanding of the local market conditions. What are the demographics of the area? What is the average income level? What is the vacancy rate for commercial properties? Is there new construction planned that could impact the value of the property?
By taking the time to answer these and other questions, you can gain valuable insights that will help you make a more informed decision about whether or not to proceed with a particular purchase. In some cases, area research may reveal that a particular property is not a good investment after all. In other cases, it may confirm that a particular property is indeed a wise investment.
Either way, area research is an essential part of the due diligence process and should not be overlooked.
I have discussed a few elements of area research in this blog post, but if you would like to find out more ways to mitigate the risk of buying a commercial property that may not succeed, check out my book, Commercial Property Investing Explained Simply.
Alternatively, if 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.