How Much Does Location Matter
As with just about any type of real estate, location can play a key factor in the value of commercial real estate. The problem with locations is that some can be trendy. Meaning what may be a hot strip mall today may not be as busy 5 to 10 years down the road. Obviously in commercial real estate, the property needs to be close to customers, workers, and suppliers or vendors. In the case of industrial and some other businesses, access to highways, airports, or railroad may be essential. If a business is just getting established in the retail industry, then the most essential part of success is the location. For businesses that don’t rely on foot traffic then location isn’t as important.
Businesses tend to expect to pay less for locations that are less desirable over other more convenient locations. Before signing on the dotted line a business must complete its due diligence to ensure that everything will be permitted for operation. For instance, some businesses have contractual restrictions for not allowing two of the same types of businesses in the same center. Zoning rules and regulations must also be taken into account. The value of commercial real estate can vary greatly, especially due in part to the location.
Investing in commercial real estate can be a big decision, and one that shouldn’t be taken lightly. The importance of location is a big deal; everything from access to surrounding businesses and home developments, are important considerations. We are all familiar with the phrase “location, location, location.” The location does have the main hold on determining the value of the investment, as well as rent rates. Rather than just thinking on a local basis, let’s first break it down by state. Some states offer better incentives for investors than others, and different real estate markets exist in each state. The local real estate market versus the state’s overall real estate market are key considerations to judge. Is the local market booming or in a state of recovery?
Many successful investors (and realtors) will tell you that the number one rule in real estate is location. While it may be easy to determine a residential real estate location, commercial real estate comes with its own set of unique items to consider. You may find a property that has a great location yet comes with a lower rate of return or a terrific property in a less desirable neighborhood that has great cash flow. While the choice is yours to make, typically a well located property will appreciate sooner than a property in a less desirable area. Better located properties also tend to sustain value over time. If the investment strategy is to buy and hold for a longer period, in the long run, the better-located property will probably result in a higher rate of return.
Location is tied to the amount of rent that can be charged and is also directly related to the value of a property. Real estate investing decisions heavily rely on numbers though, and not just location. On the flip side without a good location the numbers won’t pencil out. Price always factors into the equation of real estate investing and in a lot of cases the price may be increased because of a desirable location. A great location equates to a higher demand and in a lot of cases even higher rent.