One question I have heard a lot lately is: “Is this a good time to buy commercial real estate.”
My response is, “What are you looking for?”
Although the market is improving and new businesses are opening, business owners or investors should consider several things to determine if it’s the right time for them to buy commercial real estate.
As businesses open and expand, vacancies decrease, which results in greater return on investment. Right now, some buildings may have vacancies, but the potential to fill those vacancies looks promising. A multi-tenant building likely will sell for less while it has a higher vacancy rate. Once the building has fewer vacancies, the sales price goes up. Buyers wary of taking risks in this market often miss out on opportunities to buy when the price is right.
When I consult with buyers, I tell them to ask three questions before making a purchase:
1. Location! Location! Location! Is the building near a residential sector? Freeways? Employment force?
2. Price per square foot. In the past few years, we have seen selling prices lower than the replacement cost. Is the replacement cost of the building greater than the purchase price?
3. Are there any red flags in the accounting books, such as major expenses and low rental income?
I ask if a commercial building is close to a residential sector because I have found that where there is a workforce, there is a higher likelihood of keeping the building occupied. Not all businesses need a nearby workforce, but for those that do, this is important.
Determining whether the replacement cost is greater than the purchase price is just smart. If it would cost me $1.5 million to build it, but the purchase price is $1 million, then it already has value.
Evaluating the accounting records for red flags is critical. For example, high expenses relating to major repairs, such as roof or HVAC repairs, can indicate that those items may need to be replaced after purchase. In addition, low rents over a long period of time can be a problem, unless, of course, the sales price of the building makes sense.
So, is it a good time to buy commercial real estate in the Valley?
As long as you do your due diligence and consult with a qualified professional, the prices are prime for buyers.
Ronit Urman is designated broker and CFO for Urman Enterprises, LLC. Her expertise encompasses 20 years of commercial and residential sales, development and property management experience.
