Should you invest in commercial property?

Investing in bricks and mortar real estate isn’t just for the wealthy.

While office towers may be beyond reach, there are plenty of smaller commercial properties a mid-level investor can afford, including those with single-tenants or in the suburbs.

You may also want to consider partnering with a fellow investor and going halves, or build a small consortium to acquire something larger.

Such properties can produce steady returns in the form of rents; and provided they’re well located, will either appreciate or at least retain their value.

Still not convinced? Consider these pros and cons of commercial property before signing the papers.

Pros

• Steady growth in employment, manufacturing and consumer spending since 2010 has reduced office, industrial and retail property vacancies. This heightened demand has caused lease rates to edge up.
• Risk-averse operations models have helped to improve balance sheet performance of developers, construction firms and realtors.
• More U.S. retailers (e.g. Nordstrom) are opening locations in Canada. This means retail property prices could head higher, and that’s great news for sellers.
• Rents typically rise in periods of elevated inflation. While consumer prices are under control right now, that could change.
• Tighter mortgage rules, which have made buying a home more difficult – together with continued immigration and growth among lifestyle-choice renters – could significantly improve the economic landscape for purpose-built rental apartments in Canada’s major urban centres, suggest statistics from accounting firm PwC.

Cons

• There are still pockets of vacant commercial buildings in the U.S. and Canada. That can increase in an economic downturn.

If you decide commercial property is right for you, here are some tips to help you invest:

• Invest in a location near mass transit, says Lori-Ann Beausoleil, partner and national real estate leader at PwC. “Competition for these sites and uses will continue to place pressure on developers to reformat their product offerings to optimize space as these locations become scarce.”
• Research vacancy rates in the city you want to invest in, and check out the local employment market. Ensure it’s growing so you can count on having tenants.
• Make sure you get investment, legal and tax advice before you buy so you know whether you can afford the property.
• If you’re investing in retail property, look for spaces tenanted by well-managed retailers that have performed consistently, and may be expanding into new locations.

Updated July 2016.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.