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Thanks for stopping by the Three West Blog. Hopefully we can offer you some expertise regarding Northern Michigan commercial real estate, brokerage, leasing, property management, and business issues in and around the Traverse City region. The main purpose for our blog is to educate and help those looking for a resource as it relates to your commercial real estate and business needs. If you have a specific question, shoot us an e-mail at info@threewest.net and we'll do our best to provide an answer. We'll also post many of the frequently asked questions and answers that we come across on a daily basis. We look forward to hearing from you. Check back often.

Commercial Real Estate

Investing in Commercial Real Estate

Posted by Kevin Endres - Jul 19, 2010

The worst of the residential real estate issues are beginning to move toward resolution and a certain normalcy is returning to the market. But what about the commercial real estate market, is it still trending downward, will there be a “crash”, has the market hit bottom, when will it rebound?

All of these are excellent questions with no easy answer, however there are indications that the commercial market will not “crash”. There seems to be a resiliency that is allowing for adjustments in value, mortgage work outs, and lenders are becoming interested in loaning money for owner occupied commercial properties utilizing the SBA Loan programs.

Additionally, prices are depressed and interest rates are low. Investors, with cash enough to structure a 60% loan to value transaction, may be able to seize opportunities that are great investments. Adding commercial real estate to an investment portfolio can enhance diversification, provide a hedge against inflation and generate income.

Determining what type of commercial real estate investment is best for your portfolio hinges on understanding the relationship of risk and return. There are three primary categories of commercial investment strategy, each offering certain risk and return characteristics. A balanced investment portfolio includes a mix of these three strategies.

CORE INVESTMENTS:

Core commercial real estate investment programs generally use conservative strategies for lower-risk investments. Core properties are typically well-leased and well-maintained office properties located in well established markets with stable credit worthy tenants.

Core investments are designed to protect against inflation and have a primary investment objective of creating income and capital preservation. Typically core investments have a long-term holding period of eight (8) to twelve (12) years.

Core Investments:

Conservative risk
Long-term holding period
Objective is current income

VALUE-ADDED INVESTMENTS

Value-added investments offer a moderate level of risk. The goal of value-added investments is to acquire properties that need improvement or repositioning. Properties classified as value-added usually require amenity and aesthetic upgrades, or require management or operational improvements. Value-added investments usually have a short-term holding period of three (3) to six (6) years and focus on appreciation of value rather than income.

Value-Added Investments:

Moderate risk
Mid-term holding period (three to six years)
Objective is value-appreciation

OPPORTUNISTIC INVESTMENTS

Opportunistic real estate investment programs assume the greatest risk of all three asset classes, but have the objective of generating higher returns. These investments generally require the investment program to convert, redevelop, or reposition an existing property in order to seek its highest and best use. Opportunistic investments generally have a short-term holding period of three to six years and are geared to maximize appreciation. To add value property managers may re-tenant, reposition, recapitalize, develop or re-develop the property.

Opportunistic Investments:

Higher risk
Short-term period ( three to six years)
Objective is value creation

In conclusion, there are many considerations and options that need to be explored and evaluated when investing in real estate. This is an excellent time, with prices depressed and interest rates low, to invest in commercial real estate. Three West has the expertise to assist investors in all facets of the evaluation process, we can provide the property management services necessary to maximize the investment and at the end of the holding period apply our marketing strategies to sell the property.