How to Choose a Location for Commercial Real Estate
The tried and true real estate adage about "location" may be overused—and everyone knows it's not all about location. However, when making initial decisions about a commercial real estate project, location is certainly an important factor.
Location has an impact not only on what can be developed, but also on cost projections, long-term viability, type of development, return on investment, the environment, and myriad other topics.
Whether the planned development is for a hotel, a warehouse, self storage space, retail space or a restaurant, a medical clinic or a mini-golf course, adjacent land use, streets and neighboring properties all play a part in the decision-making process.
Look at the Complete Picture
Location, of course, is a great deal more than just the physical plot of land, or a single building. It also involves more than a single neighborhood. Any commercial development must take into account current zoning and development and future projections. Due diligence is always required. The best plans won't succeed in the wrong locale.
Here are some primary points to consider before buying commercial real estate:
- Traffic Patterns: Take a close look at the major supply routes, including freeways and major arterial streets, local neighborhood feeder routes and ease of access for vehicular and foot traffic, depending on what is appropriate for your particular business enterprise.
- Environmental Concerns: This may be a judgment call, but it deserves attention. The needs and concerns that relate to industrial uses will be entirely different from the physical surroundings required for a retail center or upscale restaurant. Ancillary requirements, such as parking, lighting, landscaping and crowd control should also be analyzed.
- Acquisition Costs: It goes without saying that cost is a major factor. However, never let a low initial price unduly influence your decision, because you may have to spend additional dollars to compensate for other shortcomings.
- Infrastructure and Support Facilities: On the location checklist, note the existence of needed support. Everything from quality internet to fire department and emergency response time should be high on your list of location requirements.
- Zoning and Land Use: Existing zoning is pertinent, even for undeveloped land. Allowable uses for a particular tract may be limited. It's true that some municipalities are open to rezoning large parcels as long as master plan requirements are preserved, but such requests can be time-consuming and expensive.
- Municipal Growth Pattern: It's a fact that most cities grow according to established patterns, rather than expanding in patchwork fashion. Look to the future to determine whether your location will have long-term longevity for its intended use. Historical districts often have stringent requirements for redevelopment and updating.
- Architectural Limitations: Height and style restrictions may limit your options. New developments tend to have more stringent rules than older, existing areas. Always examine applicable rules and regulations.
- Taxes, Utilities and Fees: The variables in assessments and recurring charges for commercial real estate may make your choice very clear. In newer areas, look to surrounding development to gain perspective.
- Expected Appreciation: Anyone who invests in land or property expects its value to appreciate over time. While it's not wise to make a decision based solely on future potential, it should be part of the equation as you consider alternative choices.
- Development Timetable: Again, whether you start with raw land and plan to build and develop a multi-use tract, envision a remodel of historic property, or simply plan a finish-out of interior space, there will be a lag time. Investigate planning and permitting requirements, consult with building officials, architects and contractors in advance, and factor the timing into your decision.
- Development Costs: Another important financial consideration. Your total dollar expenditures add up quickly. Never underestimate initial costs, no matter how great the potential return.
- Climatic Concerns: Is the property location subject to flooding? Is there a threat of seismic activity? What are the seasonal weather patterns that might influence your decision to buy or lease in a specific location? More importantly, perhaps, what are the weather threats that would affect or impede a business in that location?
Focus on Specifics
The same considerations apply, whether one seeks raw land, an existing building or lease space.
The base valuation of real estate and the expected return on investment are key to deciding on the best location. Although top locations may demand an initial premium price, the acquisition cost is only a part of the puzzle, according to successful investors and developers. Potential may be the great unknown, but there are ways to judge growth factors and future desirability. Weigh the advantages of a location in a currently desirable area against the growth potential of locating in a currently underdeveloped area.
Projected return differs according to the type of investment. Expected ROI on lease space is calculated differently than return on raw land, but the final profitability is always the key. Similarly, choosing a location for commercial real estate will depend on individual goals and the distinctive benefits one has in mind.
Anyone involved in the acquisition of commercial real estate will have a slightly different set of rules and formulas for assessing a location's value. And commercial real estate investors will examine yet another set of considerations before making an investment decision. Basic guidelines, however, can be applied across the board and all across the country.
No matter what individual concerns are deemed most important, the value of having a somewhat standardized approach to all CRE decision-making cannot be underestimated. Whether the deciding factor might hinge on zoning or financing, cap rate or occupancy projections, cost of renovation or long-term appreciation, location and price are invariably top concerns.
Beyond that, the choice must always be predicated on particular circumstances, and timing is always a factor. This checklist should be considered a starting point, but it does not constitute an infallible formula.