Disadvantages of Commercial Real Estate
Rules and regulations are the primary deterrents for most people wanting to invest in commercial real estate directly. The taxes, mechanics of purchasing, and maintenance responsibilities for commercial properties are buried in layers of legalese. These requirements shift according to state, county, industry, size, zoning, and many other designations. Most investors in commercial real estate either have specialized knowledge or a payroll of people who do.
Another hurdle is the increased risk brought with tenant turnover, especially relevant in an economy where unexpected retail closures leave properties vacant with little advance notice.
With residences, the facilities requirements of one tenant usually mirror those of previous or future tenants. However, with a commercial property, each tenant may have very different needs that require costly refurbishing. The building owner then has to adapt the space to accommodate each tenant's specialized trade. A commercial property with a low vacancy but high tenant turnover may still lose money due to the cost of renovations for incoming tenants.
For those looking to invest directly, buying a commercial property is a much more costly proposition than a residential property. Moreover, while real estate, in general, is among the more illiquid of asset classes, transactions for commercial buildings tend to move especially slowly.
Pros
- Hedge against stock market
- High-yielding source of income
- Stable cash flows from long-term tenants
- Capital appreciation potential
Cons
- More capital required to directly invest
- Greater regulation
- Higher renovation costs
- Illiquid asset
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