Major twists are afoot in commercial real estate markets. So which properties are sophisticated investors stalking now, do you know how to recognize them, and what’s the key to profits in 2014?
News of a commercial real estate rebound and shrinking inventory with increased competition in hot urban business hubs may be old news for those wired into markets by now, but there is still clearly serious fortunes to be made by those that know where to get ahead of the curve and where all the difference in execution is made.
According to the new report Emerging Trends in Real Estate 2014 “2014 is the year that institutional investors reduce their emphasis on core properties. … their future equity investments should reflect a search for higher returns in value-added and opportunistic investments in secondary locations, with development focused in only the strongest markets.”
So what we are really seeing is Class A being kicked to the curb in favor of Class C investment opportunities. So why is this happening, and for those newer to commercial real estate investment how do you tell the difference between classes of commercial properties?
What makes distinguishing varying property classes more difficult for newer commercial real estate investors is a lack of a hard checklist or grading system for identifying class A, B and C buildings. However, here are how they are generally separated by industry professionals for being marketed for sale and rent…
Class A properties are the ultimate crème of the crop when it comes to prestigious buildings in top business and retail districts. They often own their brand, command the top rents, boast the latest technology and finishes and siting.
Class B buildings are your middle of the road deal. These may have previously been A properties when they were newer and might be able to claw their way back. However, they probably are no longer on the hottest corners, are slightly aged or have more modest features and this are limited in the rents and tenants they attract in line with this.
Class C property is more likely to be found further out, maybe 20 years old or older, can be functionally outdated for many tenants, property condition likely requires improvement and renovation, rents are below average for the broader area.
As confidence has returned to markets and all are bullish on the outlook for the foreseeable future investors and lenders recognize the best spreads, cash flows, profits, cap rates and capital gains potential is where the growth opportunities are. This is increasingly in secondary markets and lower class properties which have potential. However, whether these properties are to be flipped in the short or mid-term, or held for long term income and wealth building it is the property management that will make all the difference in net returns.