Big Town Real Estate

Big Town Real Estate

Commercial real estate investing in Los Angeles

Commercial real estate investing in Los Angeles

Commercial real estate, a cornerstone of the broader real estate industry, encompasses properties and assets used for business as well as large residential complexes. The strict definition is, if it is something that someone cannot live in, it is commercial (Everything from small storefront to a skyscraper) and if someone can live in it, then it is commercial if it has 5 or more units. (Anything from 1-4 is “residential”). Commercial real estate is different from residential in many ways, but the primary ones are:

          *Commercial real estate is valuable ONLY for the income it produces. This is different from residential, where people can value a home as a place that the want to live. Commercial real estate is owned by investors; they don’t care about countertops or accent walls, unless it can get them more rent;

          *As a consequence of the above, commercial real estate is appraised and valued differently than commercial; It is valued almost solely on how much revenue it brings; it is not valued as heavily on comparable properties. As an example, if the house down the street that is the same as your house sells for $500k, then that will be a heavy influence on the valuation of your house being worth $500k. Because that is how the “comparable sales” appraisal model works. In commercial, a comparable building down the street goes for $500k, but your building, for whatever reason, brings in more income, then your building is worth more, period, end of story. Does not matter if they are identical.

*Commercial real estate is bought and sold differently. There is no official public listing service for commercial real estate like there is for residential.  For example, most commercial real estate gets bought and sold through personal referrals. Brokers literally call up other brokers and investors and say “Hey, I have a building for sale, are you or any of your investors interested?” And that is how it goes. Much commercial real estate never even hits the public listings- it sells through the back channels.’

There are lots more differences, and over the years, the commercial real estate sector has had many evolutions and transformations. From the “big offices with cubicles” years, to the “WeWork/Executive Suite years” to then COVID-19 and now remote working years- commercial real estate is a constantly evolving sector and it is far more affected by economic and social tides than residential. (E.g. People always need a place to live; they don’t always need an office though.)

Understanding these historical shifts is crucial for stakeholders in the commercial real estate market. And if you are going to get into commercial real estate, you better bone up on these. We keep up with such trends here at BTRE.

What is a Commercial real estate?

Commercial real estate refers to properties and assets used primarily for business, investment, or income-generating purposes. It encompasses a diverse range of property types, including office buildings, retail spaces, industrial warehouses, multifamily apartment buildings, and hospitality establishments. Unlike residential real estate, which is used for personal housing, commercial real estate is focused on generating revenue. One way to look at it is that, anything that is not made for people to live in is commercial, and anything that is made for people to live in but there are more than 5 units in it (e.g. apartment building) is commercial. Anything that is 1-4 units of living space, is residential.

What are the basics of Commercial real estate investing?

Commercial real estate investing in Los Angeles involves acquiring and managing properties with the aim of generating income or achieving long-term capital appreciation. The basics of Commercial real estate investing include understanding property types, evaluating potential returns, knowing how to underwrite a deal, knowing how to conduct due diligence, and probably most importantluy- knowing how to manage a property to optimize revenue- because remember, the value of your commercial property ONLY goes up if revenue goes up. It is not like residential, where you can but it, do nothing, and in 10 years, its doubled or tripled in value. If you buy commercial, do nothing, never raise rents, never figure out how to cut costs and manage efficiently- in 10 years your property might be worth similar to what you paid.

How can I find Commercial real estate for sale?

Finding Commercial real estate for sale involves various methods, such as utilizing real estate listings platforms, working with commercial real estate brokers, attending property auctions, or networking within the industry. Crexi.com and loopnet.com have commercial listings- but many people “in the know” will say that those sites are where “deals go to die.” The best way to get commercial deals is establish relationships with commercial brokers, and get on their list of people to call when things come up.

What are the options for Commercial real estate loans?

Commercial real estate loans are financial instruments used to finance the acquisition or development of commercial properties. There are several options available, including traditional bank loans, commercial mortgages, Small Business Administration (SBA) loans, and commercial bridge loans. Each loan type has its own terms, interest rates, and eligibility criteria. Traditional bank loans typically offer competitive rates for well-qualified borrowers, while SBA loans are designed to support small businesses. Commercial bridge loans provide short-term financing for property acquisition, often with higher interest rates but faster approval processes. There are tons of commercial options for financing. The two things to know are: Commercial financing gives better rates than residential; Commercial financing is far more flexible than residential; Commercial financing is actually much easier in many ways than residential because it depends more upon the property and less upon the buyers income and debt. Call a commercial lender for details.

How do I choose a Commercial real estate broker?

Selecting a Commercial real estate broker requires careful consideration of factors such as experience, market knowledge, specialization, and reputation. Start by identifying brokers who specialize in the specific type of commercial property you are interested in, whether it’s office, retail, industrial, or multifamily. Research their track record and client testimonials to gauge their performance. Additionally, consider their local market knowledge, as it can be a valuable asset in identifying opportunities and negotiating deals. Interview potential brokers to assess their communication skills, responsiveness, and compatibility with your investment goals and strategies.

Where can I access Commercial real estate listings?

Accessing Commercial real estate listings can be done through various sources, including online real estate listing platforms, Commercial Multiple Listing Services (MLS), brokerage websites, and industry publications. Online listing platforms like LoopNet, CoStar, Crexi, and Realtor.com Commercial provide searchable databases of commercial properties for sale and lease, allowing users to filter listings by location, property type, and other criteria. Commercial MLS services are often used by licensed real estate professionals to share and access property information. Brokerage websites and industry publications may also feature exclusive listings and market insights. However, as written above- the best way to get commercial listings is to get in touch with brokers- because many “listings” are never “listed”- you just need to call, and you need to be the person the broker thinks of when something comes up.

What is involved in Commercial real estate development?

Commercial real estate development encompasses the process of creating, planning, and constructing new commercial properties or redeveloping existing ones to enhance their value and functionality. It involves tasks such as site selection, zoning approvals, architectural design, financing, construction management, and leasing or selling the developed space. Developers work closely with architects, contractors, and legal experts to navigate the complex development process, ensuring that the project aligns with market demands and regulatory requirements.

What are the current Commercial real estate trends?

Current Commercial real estate trends are shaped by factors such as economic conditions, technological advancements, demographic shifts, and changes in consumer behavior. Some notable trends include the rise of e-commerce and its impact on industrial and logistics properties, the evolution of flexible office spaces in response to remote work trends, and the increasing focus on sustainability and energy efficiency in commercial buildings. COVID 19 and the ensuing “work from home” and “Hybrid” work model has had major impacts on office properties. We recommend that people stick to commercial residential properties (i.e. buildings where people live) as opposed to commercial business properties, as commercial living properties are better immunie from recessions, and other economic forces. (Because, people always need a place to live).

How is the Commercial real estate market performing?

The performance of the Commercial real estate market varies depending on location, property type, and economic conditions. For example, apartments are performing nicely, and office buildings are performing badly- but not all office buildings are doing badly. Smaller ones with just a few offices and lesser rents are doing great. Big fancy ones – those are suffering. Retail is doing fine, but not everywhere. Essentially, there is no ”commercial real estate market”. There are only “Local commercial real estate markets”. Monitoring local market performance is essential for investors, property owners, and developers to make strategic decisions regarding property acquisition, leasing, and asset management.

How is Commercial real estate valuation determined?

Commercial real estate valuation is determined through various methods, including the income approach, sales comparison approach, and cost approach. The income approach is the primary way however, and involves assessing a property’s income (or in some cases, potential) income through rents and then calculating the expenses, and plugging these numbers into certain calculations to determine how much (if any) money the property will generate. And once the revenue of the property is determined, then a sales price can be calculated. There are multiple ways of doing this- cap rate calculation, Average rate of return calculation, cash on cash return calculation. A commercial real estate broker can help you with these, and guide you through the morass.

What should I know about Commercial real estate leasing?

Commercial real estate leasing involves renting commercial properties to tenants, typically under lease agreements that specify terms, rent amounts, and responsibilities. Understanding Commercial real estate leasing is crucial for property owners and investors.  Probably the most important thing to know is, investors need to rigorously calculate and estimate incomes and expenses before getting into a deal, because a commercial property that loses money is basically worthless.

What is involved in Commercial real estate management?

Commercial real estate management encompasses the operation, maintenance, and oversight of commercial properties. Property managers are responsible for tasks such as tenant relations, rent collection, property maintenance, and financial management. They play a vital role in ensuring that properties are well-maintained, tenants are satisfied, and rental income is maximized. Effective management is probably the most essential element of commercial property ownership which can make or break a property.

What are the benefits of Commercial real estate investment?

Investing in Commercial real estate offers several benefits, including potential for rental income, portfolio diversification, tax advantages, and long-term capital appreciation. Commercial properties can generate regular rental income, providing a steady cash flow for investors. Commercial investments provide often times, bigger returns, faster than residential properties. Rents can be increased far easier, due to no rent controls. Even in rent control environments, the scale of commercial properties is just far bigger than residential, which lends itself to larger returns. For example, if rent is increased 5% on a property bringing in $5k per month, that is a $3k/year increase. If rent is increased 5% on a property bringing in $100k per month, that is a $60k/year increase. Small adjustments on commercial properties, because of the scale of them, can yield larger results. Commercial real estate rewards creative, good property management.

What options are available for Commercial real estate financing?

Commercial real estate financing options include bank loans, commercial mortgages, private lenders, real estate investment trusts (REITs), and crowdfunding platforms. Each financing option has its own terms, interest rates, and eligibility criteria. Bank loans and commercial mortgages are traditional financing methods, often requiring strong credit and collateral. REITs allow investors to participate in Commercial real estate through publicly traded shares. Crowdfunding platforms enable individuals to invest in commercial properties collectively, often with lower capital requirements.

How is Commercial real estate appraisal conducted?

Commercial real estate appraisal is conducted by licensed appraisers who assess a property’s value based on various factors, including property type, location, income potential, and market data. Appraisers use recognized appraisal methodologies to provide an objective and unbiased valuation. The appraisal report includes a detailed analysis of the property, comparable sales data, and the appraiser’s conclusion of value. Lenders, investors, and property owners rely on appraisals to make informed decisions regarding property transactions and financing.

What are the key regulations in Commercial real estate?

Commercial real estate is subject to a range of regulations at the federal, state, and local levels. These regulations cover zoning and land use, building codes, environmental requirements, leasing laws, and tax regulations. Compliance with these regulations is essential to avoid legal issues and ensure smooth property transactions. Investors and property owners must be aware of the specific regulations that apply to their properties and locations.

How can I perform market analysis in Commercial real estate?

Performing market analysis in Commercial real estate involves gathering and analyzing data on market trends, property performance, supply and demand dynamics, and economic indicators. It requires access to market data sources, an understanding of local market conditions, and proficiency in financial analysis. Market analysis helps investors and stakeholders make informed decisions about property acquisition, leasing, and management strategies, maximizing the potential for success in the Commercial real estate market.

What are effective investment strategies in Commercial real estate?

Effective investment strategies in Commercial real estate depend on factors such as investment goals, risk tolerance, and market conditions. Strategies can include value-add investing, where properties are improved to increase value, or income-focused strategies that prioritize rental income. Some investors focus on specific property types like office, retail, or industrial, while others diversify across sectors. Successful strategies also involve thorough due diligence, financial analysis, and an understanding of market trends to identify opportunities and mitigate risks in the Commercial real estate market.

For more information on Commercial real estate investing in Los Angeles contact Big Town Real Estate today.

Sources

Croom, B., Kennedy, S., Ojha, S., & Sparks, J. (2020). Analysis of the Commercial Real Estate Market in a post COVID-19 World. SMU Data Science Review. Available at: https://scholar.smu.edu/datasciencereview/vol3/iss3/5

Gyourko, J. (2009). Understanding Commercial Real Estate: Just How Different from Housing Is It? NBER Working Paper No. 14708. Available at: https://www.nber.org/papers/w14708

Andra C. Ghent, Walter N. Torous, and Rossen I. Valkanov (2019). Commercial Real Estate as an Asset Class. Annual Reviews. Available at: https://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110118-123121

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