When most people think of investing in and managing property, residential real estate is usually the first thing that comes to mind.
This type of property is typically viewed as a traditional and safe investment, with most assuming breaking into the commercial property market is too complex or risky.
However, there are many reasons why commercial real estate can be a lucrative and stable option for many investors, particularly in the current economic environment.
The first thing to consider is income potential. In general, commercial property generates a significantly higher return for investors compared to residential, especially in major cities. The average rental return for residential properties across Australian capital cities is 3.3 per cent (CoreLogic, July 2022). In contrast, it’s not uncommon to achieve a gross rental yield between eight and 12 per cent for commercial properties. This high return makes them positively geared investments, which can be beneficial depending on your investment strategy.
Another key difference between the two types of property classes are lease terms. Residential lease terms tend to be on the shorter side, with the majority of Australian renters currently on fixed leases of six or 12 months. This can make it a tough job for residential property managers who are tasked with handling a revolving door of tenants.
In comparison, commercial real estate leases can range anywhere between three to 10 years.
This general trend towards longer tenancies works in favour of landlords and property managers, as it grants them greater security and assurance of rental income for a longer fixed period. Additionally, most commercial tenants are consumer-facing and typically have large cash flows, meaning they are typically more committed to the property and less likely to default on their rental payments.
Commercial property also offers property managers and investors a wider range of asset classes to choose from, including commercial offices, retail shops, and industrial properties. This means there are a variety of options to choose from depending on your budget and preference. Commercial properties are generally lower priced compared to residential properties, so a smaller capital outlay is required.
However, like any investment, there are several areas of risk that you should be aware of before diving into the commercial property market. For one, whilst commercial lease terms are typically lengthy, this also means the property can end up remaining vacant for longer periods between leases due to the significant financial commitment required from the tenant.
Commercial properties are also more vulnerable to shifts in the market and economic downturns compared to residential property, as evidenced by elevated retail and office vacancy rates during the pandemic.
Managing commercial properties can also require a greater time commitment, for example, managing an office block that contains six different tenants. If you are opting to invest in and/or manage commercial property, you would be wise to implement a software system such as Re-Leased that cuts down on admin time and gives you wider visibility over rent collection, lease terms and important dates.
Whilst commercial property can be a more complex market than residential real estate, this asset class is ideal for those who are comfortable with assuming slightly greater risk in return for higher returns, longer leases and stable income.