Image Credit: Ken Teegardin We are currently in a highly transitional environment and are seeing this across multiple industries and different sectors. Not only do we see this trend globally, it's happening locally as well throughout Western Canada in Calgary, Vancouver, St. Albert, and Edmonton commercial real estate. Although there may be some uncertainty over how some specific businesses will perform, overall we are in a very bullish environment. Regardless of the current environment, sophisticated investors need to pay attention to the right fundamentals to ensure optimal performance from their investment portfolio. Here are the five fundamentals that investors should be looking for to find sound, sustainable and profitable commercial real estate investments in the months and years ahead. Location We've all heard location is of the utmost importance when it comes to real estate. While this is true in general, the best locations can vary over time and will vary depending on the type of performance you are seeking from your investments, such as: passive income, wealth preservation, or capital gains. Demand A new report from the Financial Post proclaims that top fund managers have moved on from the “location, location, location” philosophy to its underlying foundation demand. Billionaire property investor Sam Zell has always said “it's about supply and demand.” Savvy investors are asking themselves “Where is the demand now?” and “Where will demand be when I plan to exit this investment?” Demand impacts asset prices, earnings, cash flow and ultimately the strength of the resale market. Of course, some firms and organizations have significant influence to create and drive demand as well, which shouldn't be overlooked. Value No matter how rosy the outlook may be, smart investors avoid speculation and look at how the numbers perform today. What is the value of the investment? Are you overpaying or getting a good deal? Value Add Opportunities One of the best advantages of commercial real estate investment is the ability to influence the value of your own investments. This is something that is virtually impossible to do with stock market portfolios or precious metals. Yet, a few experienced Canadian asset managers like ReDev Properties have proven to be able to strategically add value to office and retail real estate during both great and tough times. It's wise to look at the potential for adding value by determining if there is room to add improvements to the property. A few questions that should be asked to determine potential value-add opportunities, include:
- Can the property be redeveloped?
- Can additional leasable square footage be added?
- How can rents be increased?
- How can expenses be decreased?
Structure How investors choose to invest in commercial real estate is just as important as what they invest in. Investors can run into problems if they don't invest through the best vehicles, advisors, or structures. For this reason, we've seen a notable trend in wealthy private investors and family offices choosing direct investment in real estate through smaller partnerships alongside their peers. Optimally, investors should be looking for a structure which offers low volatility, diversification, tax benefits, minimal risk, and has the strength to perform no matter which direction the market goes. Summary We are in an exciting time to invest in commercial real estate, especially in Western Canada. However, paying attention to the above fundamentals will ultimately determine which investors continue to achieve growth in the times ahead. In addition to looking at individual property features and market fundamentals, investors also need to ensure they are investing in the right way to ensure sustainable performance and maximum upside potential.