Highlighting Profitable Types of Commercial Real Estate
Many factors contribute to a profitable commercial real estate investment. At the fundamental level, the net operating income stream as a percentage of the acquisition price is where many investors start their analysis. However, other factors include streamlining operational expenses and upside with rents that might be below market. Another sometimes overlooked factor is scale. More significant multitenant properties often contribute to the stability of profitability for the respective commercial real estate investment. Along with investments in high-growth and high-traffic areas, properties with multi-tenants helps stabilize cash flow when periodic vacancies occur (i.e., cash flow does not stop from the loss of one major tenant).
- Multi-family Properties
Investments in multi-family units such as apartments (versus townhouses, condominiums, or cooperatives) in high-growth areas have yielded historically solid rates of return. Metro areas such as New York, Los Angeles, Austin, Denver, Nashville and Atlanta have proven to be among the best markets. With their rapid population rise within the past year and beyond, demand has outpaced supply contributing to rising rents and increased cash flow for many apartment investments. Property owners can also command higher rents or additional creative sources of income by including unique amenities such as assigned parking spots, gyms, pools, in-building laundry and more! According to a CBRE statistic, multi-family assets generated a 9.75% return between the years 1992-2017. This return is generally higher than the average commercial real estate returns for other product types over the same period.
- Storage Facilities
While regaining favor, self-storage facilities have often been one of the most overlooked types of commercial real estate investments. Much like apartment properties, the multitenant nature of self-storage facilities contributes to better and more stable investment returns. Storage facilities have generally performed very well in almost all economic cycles, including financial crises/recessions. Compared to many other types of commercial real estate, they are inexpensive to build yet still command higher rents as a percentage of the construction cost. Many of the tenants unintentionally become long-term tenants, with periodic rent increases secured by property owners.
- Student Housing
The student housing industry is one of the most stable market segments within commercial real estate. With long-term trends showing more students continuing to enroll in colleges or universities, student housing is a worthwhile investment consideration for investors in other product types/segments. Vacancy rates for student housing have remained considerably low (around 5%) even throughout periods of economic downturn such as the pandemic. As enrollment in higher education increases, so will the demand for student housing. Along with diversified income (income from multiple tenants), there are frequent opportunities for rent increases with the annual rollover associated with the incoming new student population.
Finding the most profitable types of commercial real estate can be challenging. Aligning your investment objectives and risk tolerance is an essential part of what we do, in addition to helping you maximize profits. At Tyler Duncan Realty Partners, we are the experts you need to make the right investment choice! Contact us today!