Residential vs Commercials

Residential vs Commercials: which is the better investment ?

As usual it depends on your goal.

 Commercial has the great advantage that requires much less  maintenance from the owner, generally an office has only a bathroom with a sink and a toilet, maybe an AC unit in case it is an office, that is all that the owner is responsible in most cases. Most commercial properties are even leased with a NNN triple net lease and the tenant is responsible for all expenses.  However, commercial properties have the disadvantage that if vacant or they became vacant it might take a long time to find a tenant and usually the landlord gives monetary concession in order to help getting a tenant in.  Also, commercial properties take longer to sell in case cash in needed out fast. 

Cost of loan: a Commercial loan has a higher cost than a residential

Residential had a setback from Covid because not everybody could pay rent but commercial has been hit very hard and did much worse in some sectors

Commercial real estate is classified in Classes which represent the condition and amenities of the property

CLASS A Top Properties and Locations new or recently renovated

Highest rent, high quality tenants, highest prices, lowest cap rates, lower risk

CLASS B  Good but not the best locations / conditions

Good rents, good tenants, in the middle between A and C

CLASS C Often outdated, near the end of their lifespan, not the best locations

Type of property:

  • Office, Retail , Industrial, Multifamily, Hotel

CLASS POST COVID ?: With Covid-19 Pandemic also the commercial real estate became a more volatile investment instrument. The whole entertainment sector, the bar and restaurant sector, the Hotel and hospitality sector and even the retail sector is having serious issues. The industrial and warehouses sectors are on the rise. Multifamily has a slow down due to Covid but I assume people will have to live somewhere so that should stabilize fairly quick

Type of property effected by Covid:

  • Office
  • Nursing Homes
  • Retail
  • Hotel

  • Multifamily
  • Industrial

Always consider highest and best use possible for the property. Keeping the same or changing the use?  A home in a town center will have a different value if it is proposed as residential vs commercial use. 

Paolo
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