Commercial Building Owner Pain Points?

Question

Hello! I know that commercial property ownership versus 4 unit MFH and SFM is very different and that includes the pain points. What are the major pain points with commercial property ownership? Thanks so much!

Joel Owens · Answer

Different level of net worth. A big fish in residential pond might own 10 houses. In the commercial space that would be like  a minnow swimming from the pond into the ocean where great whites reside.

Commercial takes a lot more capital and experience with underwriting to buy right as more moving parts typically than buying a quad or a house to rent. I have a bunch of clients buy retail properties for the first time in the commercial space and net worth tends to be in the seven to eight figures or more. Generally to buy in strong suburban figure on at least 1.5 million purchase price and up and good net worth.

Pitfalls and pain points vary greatly by retail,self storage, large multifamily,office,etc.

Greg Dickerson · Answer

In addition to what Joel mentioned financing is very different and more difficult for less qualified borrowers. You can start smaller properties using local banks am de build from there but you need to know what your doing and learn the business.

Meaghan Simonich · Answer

Thank you so much to everyone who contributed to this post! I appreciated your insight and the discussion. While I am not in the market to purchase a commercial space myself, I am excited to partner with commercial building owners and help them generate additional revenue, especially during this time.

Kristina Sparrow · Answer

I think it would be a good idea to browse the larger property management websites (JLL, CBRE, etc) to see what their selling points are. The whole point of property management is to eliminate or lessen pain points for owners.

George Baltakian · Answer

I loved reading all the comments here. Heres my 2 cents.

The capital requirements really depend on the property itself, but I disagree that it's automatically more expensive. It can be, but not always. In my market I often see small commercial properties (retail, restaurants, etc) that are around the same price as residential property in the area. However, the big capital requirement I can think of is that landlords often pay for tenant improvements, meaning they bring in architects and contractors to build out the space for the specific tenant.

Also as you might imagine, price of CRE property is heavily determined by the expected returns.

Retail tenants in my area tend to sign 3-5 year leases with options to extend, with increases in place, and they pay for utilities/maintenance. While a solid tenant creates stability and increases the value of the property, a tenant who cant pay reduces the value of the property. You are betting on the business doing well, so a lot more goes into screening prospective tenants.

However, when you have a property with solid, long-term tenants, it can be a beautiful thing. For instance, if you can lease to a strong national tenant, they might sign a 25 year lease with rent increases built-in.

If there are multiple tenants in a building, you would need to consider the tenant mix creating a good synergy in the property as a whole. (parking/peak hours, demographics, business type)

Matthew Irish-Jones · Answer

@Meaghan Simonich. A large issue when venturing into commercial is vacancy rates.

You can have a building sit vacant for far longer than a high demand Residential unit.

A lot of residential investors move to mixed use before they go to full blow commercial purchases.

Isaac S. · Answer

I don't own commercial but did some pretty extensive research in anticipation of a 1031 from apartments into various retail or office types. These pain points would be for someone like me, that is used to Multi-family and is self taught real estate but has business degree and previous non-RE business experience, so I have some business skills, but, zero commercial RE.

as previously mentioned, vacancy or turnover is much longer time frames...I can usually have someone in one of my apartments within a few days of the place be vacated. But, even in hot urban markets your commercial unit could be vacant for a few months or even as long as 12-18 months. Ouch!

TI...aka Tenant Improvements...your future tenant may want to negotiate different terms for the move in, like a few months discounted rent(this could be on top of the above mentioned vacancy) while they build out the place, or some concession for the Tenant Improvements, if you  have an empty shell it could require extensive work to make it business ready for different types of business, think needing to add bathrooms for a gym(dozens of showers and toilets, lockers, etc) or adding a fully equipped commercial kitchen(walk in freezers, special fire suppression, a few extra sinks or drains) With apartments, I rarely have to do extensive build outs or concessions for tenants, even if I have full on renovation, it is almost always replace the old with same but new, ie tear out old kitchen put new kitchen in same place, same plumbing, just new cabinets, and flooring(if you are at all handy, you can do most of it yourself, or be able to estimate accuracy of bids easily). No need for engineering or mechanical changes that a commercial build out could need.

Lastly, and to me the most important...this was previously eluded to in another post above, your customers are more professional. That's not to say their are not plenty of small single location mom and pop operators, but, from my observation, the most desirable tenants are larger regional, national or international multi location corporations. At first I thought this would be great to do business with other business people and just keep it professional, no crazy tenants with outrageous  issues, just two rational parties with common business interests. HOWEVER, at a certain point as I was talking to a commercial broker, they made it very clear that you are going to being negotiating with people that do this for dozens, hundreds or even thousands of locations..they are pros, like above someone mentioned swimming with sharks, as multifamily LL I would usually be the smartest or most experienced(the shark) between me and most of my tenants, but, I shouldn't delude myself by thinking that dynamic would stay the same in commercial...I would now be the small fish swimming among packs of big sharks. That could get painful quick. You will probably need help(hire your own sharks, ie brokers, lawyers) and have to pay for it accordingly.

Lastly, the above pain points are all manageable if you are prepared(good brokers/partners and realistic planning) and well funded. I would think that some of the more experienced posters in this thread would not even think these are that painful and they are just used to dealing with these factors as part of their day to day. But, for me as outside observer looking to make that transition from multi-unit apartments to commercial, they seemed to be the most obvious possible pain points for me.

I hope this helps and wishing you all much wealth and health! Thanks for the interesting post.

Alina Trigub · Answer

@Meaghan Simonich

IMHO it is up to you personally as to which asset type to invest in. You can find pros and cons in any.

To help you understand the barriers to entry for MFH investing, please read the following:

https://www.biggerpockets.com/blog/10-things-investors-should-know-before-jumping-into-multifamily-housinghttps://www.biggerpockets.com/member-blogs/10850/87253-should-i-scale-my-investment-from-single-family-homes-to-multifamily

Charles Carillo · Answer

@Meaghan Simonich

Commercial multifamily is similar to smaller multifamily in the sense of managing your tenants, contractors, handyman etc. You will need to service your tenants when they report a problem, units need to be turned, mechanicals need to be serviced etc. With larger multifamily you will have more systems in place and more negotiating power. Costs will be less per unit when compared with smaller multifamily.

Commercial properties (retail, medical, office etc.) require more time to find tenants. A large commercial landlord told me years back that "when the units are occupied it is great, but when there are vacancies it is very expensive." This differs greatly with multifamily where you can list a made-ready apartment, setup 5-10 showing appointments for the same day and rent it by the end of that day.

If you want to add value to a commercial landlord, one way would be to explain how you can limit their vacancies by having contacts within the industries they are renting to; for example; contacts with local dental associations etc.

Mike L. · Answer

@Meaghan Simonich

Hi! If I knew more specifically what you were wanting to do, I could probably give better insight. That said:

In general, owning commercial property can be much less painful and less hands on than dealing with residential tenants. Your tenants are typically going to be more experienced and professional. Plus, often times the tenant is paying taxes, insurance, and maintenance. If you have a good tenant, it’s close to just collecting checks. There are a lot less potential tenants for a commercial building than for a residential property, so they can be harder to rent. Also, financing terms are less favorable than residential terms. Amortization schedules are almost always 25 years or less.

During covid, pain points are, tenants can’t pay because they can’t be open or are limited. However, good banks are being flexible and allowing deferred payments.

Mike

Commercial Building Owner Pain Points?

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