- A commercial property’s location is a key driver of its potential investment success
- As part of the pre-purchase due diligence process, it is critically important to evaluate a property’s location on three different levels, market, submarket, and property.
- A market is defined as the MSA or city that a property is located in and good markets are characterized by high growth in population, jobs, and median income. In addition, they tend to have a diverse economic base and access to multiple modes of public transportation.
- A submarket is a smaller division of a market and the strongest ones are evidenced by relative stability, a favorable business climate, and strong dining, shopping, and entertainment amenities.
- Finally, the property level concerns the asset itself. The most attractive properties tend to have a good, high traffic location with high visibility, good signage and ease of ingress/egress.
Although the saying is cliche, it tends to be true, the three most important aspects of a commercial property are: location, location, and location. The same property in a good location could prove to be substantially more successful than if it was located in a less desirable area. But, what separates a good location from a bad one? Unfortunately, there is no straightforward answer because it can vary by investor, but there are a few general characteristics that all good locations tend to have in common. We assign them to three different “levels”: market, submarket, and property. Each is discussed in detail below.
What Makes a Good Market?
Specifically, a market is defined as the Metropolitan Statistical Area (MSA) and/or city in which the commercial real estate (CRE) asset is located. As a shorthand, most investors will name the city as the property’s location. For example, they may say, “I am looking in the New York City market.”
When leasing commercial property in a given market, an investor may place more or less emphasis on a particular data point depending on their desired property type. For example, a multifamily investor who is looking to buy several apartment buildings may care more about one aspect of the market than a self-storage or office building investor who may care about others. However, in general all investors look for the following characteristics to signify a strong real estate market:
- Growth: Is the population in the market growing or shrinking? Growing markets mean that there may also be a growing need for different types of real estate properties.
- Jobs: People tend to follow jobs. In addition to a growing population, investors also like to see a growing number of job opportunities to accommodate all of the new residents.
- Economic Diversification: The best markets tend to have a diverse economic base, which means they aren’t tied to any one industry. For example, cities like Orlando and Las Vegas are heavily leveraged to travel and tourism, which make them particularly vulnerable to an economic downturn. But, cities like Atlanta and Dallas have many different industries, which tend to make them a bit more resilient.
- Transportation: Good markets tend to have wide availability of public transportation options. These include highways, airports, trains, light rail, subways, bike paths, and walking trails.
- Economic Drivers: Strong real estate markets tend to have one or more major local drivers of economic activity. These drivers could be things like: a major employer (e.g. Disney or Amazon), a major university, government activity, a major research hospital, or a major technology hub. These sorts of drivers tend to anchor a market and attract other companies, entrepreneurs, and people.
- Favorable Supply & Demand Characteristics: Finally, good markets have favorable supply and demand characteristics for the desired property type. For example, if an investor is looking for class A office space, they would not want to choose a market with an excess supply of it, this will only serve to depress rental prices and limit their upside.
Once a market is chosen, the next step is to look within it for the most promising “sub” markets.
What Makes a Good Submarket?
According to CoStar, a major commercial real estate research firm, a submarket has the following characteristics:
- It represents a division of a primary market
- It is outlined by a specific geographic boundary that describes a core area that is competitive with other submarkets.
- It constitutes a generally accepted primary competitive set of areas.
- It represents similar property types (office, industrial, retail, etc.)
- It does not overlap with other submarkets and is a contiguous geographic area.
For example, the Metropolitan Atlanta market has many different submarkets like: Lower Buckhead, Upper Buckhead, Macon, Alpharetta, and West Atlanta. Some of these are more favorable for an investment property purchase than others, depending on the property type. Strong submarkets also tend to have several characteristics in common:
- Stability: Good submarkets tend to be well established with a history of relatively stable prices through all phases of the economic cycle.
- Favorable Business Climate: The best submarkets tend to have a pro-business attitude, which is expressed through favorable zoning laws and other local rules and ordinances that make acquisition and property management relatively easy for a commercial rental property.
- Path of Progress: Markets and cities are constantly growing and changing and the best submarkets tend to be in the “path of progress” of these changes. This means that there are a multitude of new and planned projects with the immediate vicinity of the target property that will serve to enhance its value and/or attractiveness.
- Amenities: Strong submarkets tend to have plenty of amenities for its residents and/or visitors to enjoy. Typically, these amenities include an ample number of shopping centers with a diverse selection of retailers and plenty of dining and entertainment options.
If both the market and submarket are favorable for investment, the final piece of the due diligence puzzle is to look at the characteristics of the property itself.
What Makes a Good Property?
The property level theme continues with the idea that, depending on the different types of commercial real estate desired, an investor place added emphasis on certain characteristics over others. But, in general, the following attributes make for a good potential property:
- Traffic: Good properties have high levels of traffic. For retail properties, this means high pedestrian and vehicle traffic. For an industrial property, this could mean high truck and train traffic. Whatever the type, it is important that there be enough traffic to sustain the businesses who lease space in the asset.
- Ingress/Egress: No matter the property type it is important that it is easy to get into and out of it. This means looking for things like dedicated turn lanes and signalized intersections to make it as easy as possible for individuals to come and go.
- Parking: Again, regardless of the property type, it is important that there be enough parking spaces for all who visit. Typically, there is a desired number of parking spaces per square foot of leasable space.
- Visibility: Commercial buildings, especially retail assets, should have strong visibility from the road with good signage. This tells potential visitors exactly where the property is located and what businesses are located within it.
- Surrounding Uses: The properties surrounding the target should have complementary uses. For example, a retail center with a grocery store and pharmacy would be well served to be surrounded with residential real estate whose occupants are potential shoppers at the center.
- Valuation: The property’s price, relative to comparable properties in the surrounding area should create a compelling value.
If a property exhibits all of these characteristics, it may make for a potentially strong real estate investment.
Summary & Conclusion
A property’s location is a critical component in its investment success and it should be evaluated at three different levels: the market, the submarket, and the property. Depending on the specific needs and desires of an individual investor, the preferred characteristics of a market/submarket/property may change, but in general they share some commonalities.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
Before investing in a property, we invest a significant amount of time and resources to understand the market, submarket, and property to ensure it offers the best chance for a favorable return.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.
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