Fort Lauderdale Real Estate | Commercial Real Estate Basics for  Investing in Ft. Lauderale  

According to a recent study in The Economist, residential property investment in developed countries amounted to $48 trillion, while commercial real estate investment was approximately $14 trillion. The smaller number may simply be because commercial real estate investment is more complex, so most investors start out with residential investments.

Commercial Real estate, unlike stocks or other investments, is always local — property is always somewhere, somewhere specific. The location becomes an important part of the investment. We feel at today’s prices Fort Lauderdale Real Estate is looking more and more attractive. The investor does not have to be local, but the property has a location that forms part of the investments profile. In Fort Lauderdale Real Estate, commercial property near our biggest attraction Fort Lauderdale Beach is certainly going to more expensive than areas where larger tracts of land may still be available. Fort Lauderdale’s economy is heavily based in tourism so commercial property that feeds off the tourist industry is certainly desirable. 

Location and the local Ft. Lauderdale economy affect how commercial real estate is appraised, bought, used and sold. Unlike residential property — even though one in four homes are bought by investors — commercial property is usually intended to be used for a business purpose, and is almost always about cash flow. Traffic flow directly affected by the number of Fort Lauderdale residents and tourists in any area of the city directly affects all types of commercial real estate values. From store fronts to apartments commercial cash flows benefit from higher density traffic and greater visibility.

Commercial property may be a multi-dwelling apartment complex used as residences by others, but to the investor it's a commercial enterprise. In Fort Lauderdale Real Estate, multi family housing can have different uses and markets, such as vacation rentals, crew housing, or standard years round rentals.  Different zoning and therefore uses bring about different considerations for valuing, financing, leasing, maintaining and the overall potential for a successful commercial investment. Fort Lauderdale Waterfront property and areas close to prime waterways can increase commercial real estate value dramatically in a city that has a huge boating industry. The boating industry is a big part of Fort Lauderdale’s economy and there are many types of businesses that benefit from it, the commercial locations that house these industries all benefit form the Fort Lauderdale yacht industry.

The commercial investor today is facing financing concerns and can count on having to invest a larger portion of the overall investment than they did in years past. A high Capitalization Rate (Cap Rate) and Gross Rent Multiplier (GRM) will not always be enough to be successful at finding favorable financing.

The cap rate is calculated by dividing a property's annual net operating income by its purchase price. Historically, good investments had a 10% cap rate, but in the boom years we have seen that decline to as low as 5% in Fort Lauderdale. Today we are starting to see the cap rate rise in the Fort Lauderdale Real Estate market corresponding almost entirely to lower purchase prices, as opposed to higher rents. The GRM is arrived at by dividing the purchase price by the property's monthly gross operating income. These, along with consideration of comparables, total income and replacement costs form the basis for estimating the true value of a deal.

Commercial properties are at greater risk of unpredictable changes in general economic conditions. A Ft. Lauderdale building that enjoyed a 100% occupancy rate can quickly become only half full because of factors outside the investors control. The recent down turn in the Fort Lauderdale Real Estate market and the decreased volume of real estate deals, certainly created vacancies in buildings that housed many title companies, mortgage brokers, real estate attorneys, brokers, and many related businesses which often were found in similar type properties.  Commercial property owners based around the Fort Lauderdale Yachting industry have seen similar situations. Small hotel owners have had to compete harder for the Fort Lauderdale tourist dollar driving rent rolls down and in turn cap rates.

Commercial property investment requires that the investor have a strong team, in addition to working knowledge of local laws, maintenance issues and finance. Zoning, leasing regulations, and other legal issues are more complex than for residential property. Commercial property owners usually have much larger technical issues to consider than residential owners. Electrical systems, air-conditioning, security systems, elevators,  along with fire suppression, telephone and Internet facilities all add to the complicated aspect of investing in commercial property. Even plumbing is more complicated, mortgages are more complicated and insurance is more costly, and complicated.

The tool that can make commercial real estate investing have fewer complexities for office and retail investors is the triple-net lease. In this arrangement the tenant is responsible for all the expenses and arrangements for maintenance, repairs, as well as taxes and insurance. In a declining market like we do see smaller commercial tenants unwilling to approach their leases in this fashion, when markets are hot this more the norm.

There are great potential rewards from commercial real estate investments. The current poor economic condition that has plagued the residential real estate market is spreading to the commercial real estate market as well and simply leaving room for opportunity. Residential properties over three units are considered commercial, and this can be a great place to start as residential rental rates are on the rise.

Residential investors function with the motto “people will always need a place to live”, commercial investors know that entrepreneurs will also need a place to start and operate new businesses. Thinking about a commercial real estate investment in the Fort Lauderdale Real Estate market, the team at Eric Miller and Associates is always here to help.

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