Commercial real estate investment may appear unfavorable for small businesses looking to establish or expand their physical presence. Central banks worldwide have raised interest rates for the 6th time in 2022, referring to inflation concerns and an impending global recession. This inevitably results in higher borrowing costs.
A perfect moment to buy commercial real estate doesn't exist. However, not all red flags spell doom when examining the broader picture.
According to Alyssa Dangler, a US-based commercial real estate attorney, remarkable opportunities remain. Small business owners need to evaluate their objectives and strategies.
Consider the following aspects when deciding whether to invest in commercial real estate:
Borrowing Costs
Higher interest rates may not be the deal-breaker. Still, they could prompt business owners to decrease down payments or trim other expenses to compensate for increased monthly payments. Small business owners anticipating declining interest rates may face longer waiting periods as central banks foresee future rate hikes.
Potential Renovations
Purchasing commercial real estate becomes more complex when construction loans are involved. Such financing often has variable interest rates, leaving room for increases throughout the project. Dangler mentions that lenders may require borrowers to purchase an interest rate cap to mitigate the risk of unaffordable future payments. This safeguard sets a maximum limit for the rate but adds to the overall cost.
Before proceeding with a real estate transaction, prepare for these extra expenses. If budget constraints are a concern, consider properties that don't require extensive renovations or scale down the project to essential needs.
Your Business's Growth Stage
Well-established businesses usually have capital, a clear growth trajectory, and a more appealing loan application, likely resulting in lower interest rates. Startups, however, should consider leasing before making a hasty purchase. They might achieve tremendous financial success by investing in marketing, hiring, or inventory. Leasing also offers more flexibility for relocation if the business grows.
Professional Advice
Working with a specialized commercial real estate agent can help clients compare options. Barbi Reuter, CEO and chairman of a US-based commercial real estate company, emphasize the importance of having an agent representing your interests. They can assist small business owners in narrowing down choices, comparing buying and leasing scenarios, conducting calculations, and adapting to market fluctuations.
Additionally, they can provide information on business laws governing property usage.
Your Industry
Before leasing space, assess the area's market dynamics and your specific sector. Industry-specific variations in property demand can influence your competition level and negotiation power. Reuter suggests identifying the locations of your workforce, suppliers, and customer base, depending on your business type.
Focus on your geographic market and where you operate your business. Acquire more information from industry reports on your sector's performance and data on population shifts.
