Blog - Commercial
CHECKLIST: BEFORE YOU BUY COMMERCIAL OFFICE SPACE
Buying commercial office space can be tricky and can trip up even experienced investors. So, it’s important to do your research and due diligence before you buy.
If you’re considering investing in commercial office space, there are a range of important issues to consider. Here’s a 10 point checklist to get you started…
1) Understand your buying motivations
Three common reasons for investing in commercial office space are:
1) To achieve capital growth
2) To generate income (rental return)
3) Strategy. For example, to facilitate site expansion or create a land bank for future development
So, what’s your objective?
Knowing this from the outset will help ensure you buy an asset that best meets your short, medium and long-term needs, and will help you avoid potential pitfalls.
2) Where is the premises located?
There’s an old saying that the three most important factors in real estate are ‘location, location and location’.
This applies to commercial office space as much as it does to any other type of property.
The location of a commercial property substantially impacts its capital growth potential. Office premises in prime business locations (e.g. within the CBD of major Australian capital cities) are more likely to increase in value over time.
The location will also significantly impact potential rental yield. That is, it will be easier for you to attract tenants when you buy office-space in high-demand areas.
3) Consider what other major projects are happening in the area
Assess the current and future business activity in the area by researching any major projects are happening or planned (such as infrastructure development or any other planned construction).
Being aware of projects that may positively or negatively impact the value of the commercial space that you want to buy will help you avoid future costs and issues.
4) Are the premises for your own business use?
If the office premises are for your own business’s use, they will need to suit you over the short, medium and long-term. Think about your growth goals and whether the space will be able to accommodate your business needs now and in the future.
On the other hand, if you’re purchasing with a view to renting the space out to a commercial tenant, consider:
- How attractive the premises is. Are there any repairs, maintenance or refurbishments needed to make the office space contemporary or marketable?
- What facilities the space enjoys. Is there a kitchen, shower, bathroom, storage, bike rack (end-of-trip facilities)?
- Whether the layout flexible enough to accommodate different types of tenants. For example, is there a mix of office, communal and open plan areas?
- Whether there are existing tenants already in place. If so, be sure to check the lease arrangement and the background of your tenant/s very carefully. For example, is their business sustainable and do they always pay their rent on time?
5) Consider market trends
Stay aware of the changing commercial leasing landscape.
There is currently a trend in Australia (and internationally) towards coworking spaces. If you’re looking to purchase a small strata office suite, you’ll need to stay aware of and be able to respond to this competitive threat.
6) Look at local market conditions
In Australia, both capital growth and rental yields can vary from city to city (even within different areas of the same city, e.g. CBD versus inner-city versus suburban) and are heavily contingent on local market conditions.
Vacancy rates and stock levels can also differ markedly between locations. Supply and demand are crucial factors in the price you can negotiate for any property, commercial office space included. If you’re looking to buy new office space in Sydney, there’s currently a construction boom underway. And it’s a similar situation in Melbourne.
Research and analyse all relevant information that’s available to help you make an informed buying decision at a fair market price.
7) Learn the laws surrounding zoning
Make sure you check council zoning regulations for any commercial office space that you’re considering. These zones can include sub-categories that define what type of businesses can operate in a particular location. The regulations can also affect what you’re able to do with the space and the type of tenants you’re able to attract if you plan on leasing the premises.
8) Think about interest rates and other variables
Interest rates are obviously an important consideration if you’re borrowing to finance your purchase. It’s important to shop around for the best financing deal. Even a small difference in interest rates can make a massive difference to the overall amount you’ll need to repay to your lender over the long term.
You should also consider the rising cost of credit and its impact on commercial real estate. To minimise your risk, use minimal leverage to purchase and do not be enticed by the abundance of low-cost credit.
9) Do your due diligence
When purchasing a property, it’s important to do your due diligence. This may seem like an obvious step, but it is often overlooked.
Amongst other things, ensure (at a minimum) that:
- Your solicitor checks through the purchase contract before you sign, as well as any lease documentation that may be in place for existing tenants.
- You arrange a building inspection to check for any architectural, structural, mechanical or electrical issues
- You confirm that the building and building improvements are compliant
- You review the zoning, building permits/certifications and current or upcoming developments in the area
- You consider the GST implications and other state and federal taxes that come with investing in commercial property
10) Keep your emotions at bay
Finally, it’s important to treat any commercial office space purchase as a business decision. Keep your emotions out of it and make your choice purely based on the property’s ROI potential and/or its ability to meet your short, medium and long-term goals.
Do not fall into the trap of purchasing a property in a second-rate location with poor capital growth just because it comes with an expensive fit-out.
Contact TGC, your commercial property specialists
The commercial real estate agents at TGC have over 25 years’ experience selling and leasing commercial real estate in Sydney. We have a wide range of listings in the Sydney CBD and city fringe and also provide a comprehensive property management service.
If you’re looking to buy commercial real estate Sydney, contact us today!