Six reasons commercial property remains a resilient investment
Fluctuating economic conditions have a bigger impact on residential real estate than on certain types of commercial property investment, and here's six reasons why that is the case.
Despite the current economic climate, commercial property remains a resilient and attractive asset class for investors by continually delivering positive returns.
Its ability to weather economic storms and provide stable incomes can be attributed to several factors.
Rental income and long-term appreciation are examples of the key forces driving the continued stability, adaptability and potential for growth in these investment opportunities.
Let’s explore some specific factors that make commercial property a viable investment option, including longer-term leases, established businesses and higher returns.
1. Longer-term leases
Having a longer-term lease usually means a tenant is committed to the site.
Often, the tenant has a substantial fitout in the property that can increase the security of them staying for an extended period.
In contrast, tenants in residential property are more likely to move if their circumstances change.
As long-term leases typically span several years, you can be confident that your tenants will remain in place, providing a steady income.
This allows you to plan your finances more accurately. It also adds value to a property as it demonstrates a reduced risk for potential buyers.
2. A safe haven for investors
Certain types of commercial property can be seen as a safe haven for investors, as they are less volatile than other asset classes.
For example, medical properties, essential retail and well-known big businesses that have been around for decades.
Tenants with more established businesses have a history of successfully operating in the market.
Market loyalty and brand reputation affords them a financial strength that allows them to manage their expenses during challenging times, making them less likely to default on their leases.
3. Less sensitive to rate changes
Commercial properties under $20 million, which is where individual investors participate, have lower debt levels as a percentage of the total property value.
This means commercial properties have strong cash flow positions that result in more stability for the asset class compared to residential property, which has more inexperienced and highly debt-fuelled investors.
Therefore, when interest rates go up, commercial investors in the sub-$20 million range are less affected because the market holds its value (more than residential).
This theory was proved from 2022 onwards – once rates increased over 3 per cent, there were 10–20 per cent dips in residential, yet commercial property held its value in most good markets.
4. An attractive investment
Commercial property offers higher returns than residential property, making it an attractive investment.
Commercial tenants, particularly professional businesses, are often willing to pay higher rent because of their potential to generate profits.
Commercial leases also often include provisions for rent escalations or percentage-based rent, which allows for increased rental income over time.
The stability and financial strength of professional tenants contribute to a lower risk of default and vacancy, thereby enhancing your returns.
5. Adaptability to the market
Commercial properties offer the flexibility to adapt to changing markets. Owners can easily reposition or repurpose properties to cater to changing demands like customer behaviour. For example, vacant retail spaces can be transformed into office spaces or converted for e-commerce businesses.
Plus, commercial leases often provide more flexibility compared to residential leases, where terms can be negotiated and customised to accommodate market conditions.
This adaptability allows commercial property owners to optimise their returns and remain relevant and resilient in response to shifting market dynamics.
6. Long-term appreciation
Commercial property has the potential for long-term value appreciation.
Well-located properties in high-demand areas often benefit from capital appreciation over time.
The growth of rental income from long-term leases can also contribute to the appreciation of commercial property.
Rent escalations, lease renewals and market-driven rental rate increases over time can enhance the property’s cash flow and overall value.
Investors who carefully evaluate market conditions, tenant quality and longer-term leases can capitalise on the potential for consistent rental income, long-term value appreciation and inflation protection.
By carefully considering these factors, you can make the most of the resilience and attractiveness of commercial property even in challenging economic climates.