Commercial real estate values have risen after the recession. What is considered commercial real estate? The umbrella of commercial real estate includes: office space, retail shopping centers, industrial and mini or personal storage space. Hotels and apartment units are a sub category of commercial real estate, but this article is not including these areas.
The commercial market within the 5 Southern California counties: Los Angeles, Orange, Riverside, Ventura and San Bernardino are all doing well. Vacancies are down, prices have stabilized and improved from recession levels and new construction has certainly commenced.
As a veteran of 40 years in the commercial business, I have seen several recessions, but I have never experienced anything like the recession we just had. I do not want to rehash the past; however, it depressed all aspects of the commercial business.
The good news for commercial real estate is that it has increased in the true value over 15 years and outpaced inflation. This substantial increase in value is due to a number of factors: scarcity of land, no new construction, substantial modifications in building codes and the cost of construction.
If a commercial property owner wants to take advantage of the rising values of their property, it is imperative that they manage the property in a professional manner. Commercial real estate owners can no longer be passive in the maintenance of their properties. Improving and refurbishing older buildings will dramatically improve their value. This concept of good management is not new; however, it is obvious that some owners just do not have the money because of low leasing rates or lack of interest.
I have a very good client who owns an older building. My recommendation to the owner is to invest about $500,000 to modify the building worth approximately $7 million in order to compete with much newer buildings. The owner is reluctant to invest any money due to the risk of not receiving higher rents. As a result, I feel the building will suffer a long vacancy and fail to capture the tremendous upside in rental values.
Commercial real estate is not a great investment unless the investor is willing to invest further into the property and take a much greater risk. The old saying is no risk no reward which is a true statement with almost any investment.
