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. Most firms, however, maintain that the property market remains healthy overall. J.P. Morgan, in its "2019 Commerical Real Estate Outlook," largely echoed CBRE's view stating that 2018 was the ninth year of increases in commercial property rents and valuations. Morgan predicts this pace will slow but continue and do not see a downturn until after 2019. Note that the COVID-19 pandemic, so far, has not really caused real estate value to drop substantially, and property values have remained steady or even have risen, much like the stock market through the Fall of 2020. This is a key difference between the economic fallout occurring in 2020 and what happened a decade earlier. Owning and maintaining leased commercial real estate requires full and ongoing management by the owner. Property owners may wish to employ a commercial real estate management firm to help them find, manage, and retain tenants, oversee leases and financing options, and coordinate property upkeep and marketability. The specialized knowledge of a commercial real estate management company is helpful as the rules and regulations governing such property vary by state, county, municipality and industry, and size. Often the landlord must strike a balance between maximizing rents and minimizing vacancies and tenant turnover. Turnover can be costly for CRE owners because space must be adapted to meet the specific needs of different tenants—say if a restaurant is moving into a property once occupied by a yoga studio.