Location: Why it Matters in Commercial Real Estate
Let’s be blunt; if you’re not considering location when choosing a commercial real estate investment, your investment is probably going to suffer because of it. In his book “Good to Great”, Jim Collins tells the story of Walgreen’s incredible run from 1975 – 2000. There were instances where they would bulldoze an existing location if it wasn’t on a corner so that they could put it on the corner. This is an extreme example, but we want to stress how important the location of commercial property is in real estate investment.
There are several important factors with any investment and in any real estate market, but the right location should be near the top of your list and one of the first items you consider. You can have a gorgeous retail building or office space and incredible property management in place with healthy cash flow modeled out when running your numbers, but the bottom line is that if there isn’t any traffic to your location, you’re less desirable to your tenants. Not to mention the tenants that you do lease-up may have a harder time being profitable at your location. If you’re purchasing in the industrial or manufacturing space, a well-trafficked location may not be important, but the ease of accessing the property as well as commute time for the workers at the facility will still be a component to consider.
Important Factors When Choosing the Right Location
Traffic Patterns – Make sure you understand how well-trafficked the area you’re considering is. You might get a deal on an investment property tucked behind a small strip mall, but if no one is driving passed it, no one is stopping in. Also, make sure that you have insurable access from your title company. Just because there is a road leading up to your property doesn’t mean that you have access to it. This should be part of your due diligence process.
Zoning and Title – Check the zoning and title at your location to ensure you understand the exact uses and restrictions at the property. Work with your municipality to secure a zoning verification letter so you fully understand what the allowable uses are for a structure at that location. This will tell you the restrictions that are in place as well. Fewer restrictions allow real estate investors to adapt as market trends shift. A good example would be if the need for office buildings reduces in the coming years as the movement to a remote work environment ramps up, you’ll want to know if you would be able to shift the space away from office quickly without having to go in front of a zoning board. Also, make sure you have an ALTA survey that is reviewed in conjunction with the title. An ALTA survey is more costly than a CLTA survey, but it will show if there are easements, setbacks, or encroachments that may stop down planned development.
Flooding and Earthquakes – Depending on where you are doing your real estate investing, you may need to be concerned with flooding or earthquake possibilities. This research will help you determine development guidelines and standards for new construction, as well as identify what sort of upgrades may be needed currently to be up to code with any new legislation.
Environmental Considerations – Be sure to conduct any necessary assessments of environmental concerns. This is when you need to pay attention to the businesses that have used the property in the past as well as the neighboring properties that may have had contamination issues. A phase I environmental assessment will give you the information needed to understand whether your building has a “clean bill of health” or if you need to go deeper with a Phase II environmental assessment to suss out any issues.
Neighbors – This may seem elementary but make sure you know your neighbors. Are your neighbors bringing in foot traffic? Is there a clientele that you are trying to attract or avoid? Are there businesses nearby that are complementary to yours?
As you are searching for your next great commercial space or rental property or if you are doing it for the first time, we can’t stress enough the importance of location. Lean on your real estate agent or broker to see what info they already have about the location and any other local market analysis that they may be able to share. If they have been familiar with the building for some time, they may be familiar with the building owners, current tenant lease terms, or anything else that can give you an edge and save you time as you are conducting your due diligence and finding the best location for your investment.