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Most Important Factors to Consider When Investing in Commercial Real Estate in East Texas

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1. Location: The location of the property is a key factor in determining its price and potential for success. Consider the surrounding area, accessibility, and potential for growth or decline.

2. Property type: Different types of commercial real estate, such as office buildings, retail spaces, and industrial warehouses, serve different purposes and attract different types of tenants.

3. Tenant mix: A diverse tenant mix can provide stability and reduce the risk of vacancy. Consider the type and size of businesses that will be attracted to the property.

4. Lease terms: The terms of the lease, such as the length of the lease, the amount of rent, and any additional charges or fees, will have a significant impact on the profitability of the property.

5. Financing: Securing financing for a commercial real estate purchase can be a complex process, and it is important to understand the different options available and the terms and conditions associated with each.

6. Maintenance and repairs: Commercial real estate requires ongoing maintenance and repairs to keep it in good condition. Properly managing these costs is essential to the profitability of the property.

7. Overall, it is important to carefully research and evaluate all aspects of a commercial real estate opportunity before making a decision.

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These fundamentals are the same no matter the state of the market, and they’re essential to understand before making a wise purchase.

If you’d like to talk through any of these concepts, don’t hesitate to give us a call.

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Key Terms in Commercial Real Estate

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Here are a few key terms that are commonly used in the commercial real estate industry:

 

1. Cap rate: The capitalization rate, or cap rate, is a measure of the expected return on an investment in commercial real estate. It is calculated by dividing the property's net operating income by its purchase price or current market value. A higher cap rate generally indicates a higher potential return on investment.

2. Gross lease: In a gross lease, the tenant pays a fixed amount of rent, and the landlord is responsible for all property expenses, such as taxes, insurance, and maintenance.

3. Net lease: In a net lease, the tenant is responsible for paying a portion of the property's expenses in addition to the rent. There are several types of net leases, including single net, double net, and triple net leases, which vary in the amount of expenses the tenant is responsible for paying.

4. Tenant improvement allowance: A tenant improvement allowance, also known as a build-out allowance, is an amount of money provided by the landlord to a tenant to make improvements or renovations to the rented space.

5. Escalation clause: An escalation clause is a provision in a lease that allows for the rent to be increased based on a specified formula, such as a percentage of the consumer price index.

6. Zoning: Zoning refers to the laws and regulations that determine how a piece of land can be used. It can impact the types of businesses that can operate in a particular location and the types of structures that can be built on the property.

7. Easement: An easement is a legal right to use another person's property for a specific purpose, such as accessing a shared driveway or utility line.

8. Title: Title refers to the legal ownership of a property, and a title search is a process to verify the ownership and any encumbrances or claims on the property.

9. Leasehold: A leasehold is a type of property ownership in which the owner holds the right to use and occupy the property for a specified period of time, but does not own the property itself.

10. Tenant: A tenant is an individual or business that occupies and uses a property under the terms of a lease agreement with the owner.

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Unsure about any of these terms? Give us a call and a One Rock agent will be happy to assist!

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How Markets Affect Commercial Real Estate

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All real estate is local, as the saying goes, and the best way to understand a local market is to reach out to a competent, knowledgeable, commercial real estate broker and engage their services. On a larger scale, the Texas A&M Real Estate Center is a great resource for economic data on a state level. 

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Small and large markets can act in dramatically different ways, and it’s important to understand the ins and outs of your local area.

In large urban markets, the price and availability of different types of commercial real estate often act in more established patterns corresponding to the ups and downs of the economic activity of the city or state. On the other hand, in smaller markets, price and availability of certain assets is driven by more random individual users and their specific needs or desires at any given time.

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With all of that being said, some market conditions can impact the value and performance of commercial real estate no matter the market:

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1. Demand: Demand for commercial real estate is influenced by various factors, such as the local economy, population growth, and the availability of competing properties. High demand can lead to higher rental rates and property values, while low demand can lead to lower rates and values.

2. Interest rates: Interest rates play a significant role in the financing of commercial real estate. Higher interest rates can make it more expensive to borrow money, which can impact the feasibility of a commercial real estate investment.

3. Inflation: Inflation can affect commercial real estate in a number of ways. For example, rising prices can increase the cost of materials and labor needed for repairs and maintenance, and it can also lead to higher property taxes. Inflation can also affect the value of the property by decreasing the purchasing power of the rent being collected.

4. Supply and demand: The balance between the supply of commercial real estate and the demand for it can affect the value of properties. A surplus of available properties can lead to lower prices, while a shortage of available properties can drive prices up.

5. Economic conditions: The overall health of the economy can impact the demand for commercial real estate and the ability of tenants to pay rent. Economic downturns can lead to lower demand and occupancy rates, while strong economic conditions can support higher demand and rental rates.

6. Political and regulatory environment: Political and regulatory changes, such as changes in tax laws or zoning regulations, can have a significant impact on commercial real estate. For example, changes in tax laws may affect the tax benefits of owning commercial property, while changes in zoning regulations may impact the types of businesses that can operate in a particular location.

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What the Market Looks Like in East Texas

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As we look at what 2023 has in store for commercial real estate in East Texas, it’s difficult to predict with certainty what will happen, as it will depend on a variety of factors such as economic conditions, market demand, and government policies. With a rapidly changing environment, the team at One Rock is here to help navigate your purchase, sale, or lease of commercial real estate.

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Some potential developments that could impact commercial real estate in 2023 include:

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•  Continued growth in e-commerce is not as certain as it was just a year ago. No doubt there will still be an increasing importance of online sales which leads to changes in the types of commercial properties that are in demand, such as warehouses and distribution centers.  However, in East Texas, absent any major business deciding to move a distribution center in the area, flex space warehouse/office combinations will still be in demand for small businesses.

• The COVID-19 scare caused many businesses to reassess their real estate needs, with some opting for remote work or downsizing their physical footprint, but now we are seeing this trend stabilize if not reverse. Will the “work from home” model lead to permanent changes in the demand for certain types of commercial properties, such as office buildings? We will learn a lot in 2023.

•  Interest rates are expected to continue to rise, which undermines demand for commercial real estate.

• Changes in government policies and regulations, such as tax incentives or changes to zoning laws, could also impact the commercial real estate market. Opportunity zones drove some large capital purchases into areas like downtown Tyler, an economic hub of Northeast Texas. Will those continue to occur?

 

Overall, the commercial real estate market in East Texas seems to be steadily continuing to grow, even in a higher interest rate environment. If the real estate is in a desired area and is of a quality that fits the needs of users, we are still seeing transactions even though the residential market has considerably slowed.  

 

The local market  is likely to continue to evolve in 2023 and beyond, and it will be important for investors and property owners to stay informed about trends and developments in the market. 

 

Click here to reach out to a One Rock staff member to see how they can help you with your commercial real estate needs.

 

How to Value Commercial Real Estate

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Value is a term used by appraisers, and they have certain ways of determining their values. Price is a term used by real estate brokers, and while they cannot guarantee a price, they can generally offer guidance as to what a willing buyer and a willing seller can agree to. Let’s look at price first and then talk about value.

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When real estate brokers look at the price for a piece of commercial real estate, they first determine whether or not there is a tenant paying rent. If there is no tenant, the price is generally determined by comparable sales within the last couple of years or by replacement costs to build that same building. If there is income being produced by a tenant, very often the cap rate method is used.  

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The capitalization rate, or cap rate, is a measure of the expected return on an investment in commercial real estate. It is calculated by dividing the property's net operating income (NOI) by its purchase price or current market value. The cap rate is expressed as a percentage and is used to compare the potential returns of different commercial real estate investments.

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For example, if a property has a NOI of $100,000 and is valued at $1,000,000, the cap rate would be 10% ($100,000 / $1,000,000). This means that an investor could expect to receive a return of 10% on their investment if they purchased the property for its current market value.

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The cap rate is often used as a measure of the risk associated with a commercial real estate investment. In general, properties with higher cap rates are considered to be riskier investments, while those with lower cap rates are considered to be safer. 

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However, it is important to note that the cap rate alone does not provide a complete picture of the risks and potential returns of a commercial real estate investment. Other factors, such as the location and condition of the property, the strength of the local market, and the terms of the lease, should also be considered.

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Appraisers use the cap rate to help determine value, but they also use several other methods, including the following:

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1. Comparable sales method: This method involves comparing the subject property to similar properties that have recently sold in the same market. The value of the subject property is then determined based on the sale prices of the comparable properties.

2. Income capitalization method: This method involves estimating the property's net operating income (NOI) and then dividing it by the appropriate capitalization rate to determine the value of the property. The capitalization rate is a measure of the expected return on the investment and is calculated by dividing the NOI by the property's value.

3. Cost approach: The cost approach involves estimating the value of the property based on the cost to replace it with a similar property, minus any depreciation.

4. Gross rent multiplier method: This method involves dividing the sale price of the property by the gross annual rental income to determine the gross rent multiplier (GRM). The GRM can then be compared to the GRM of similar properties to estimate the value of the subject property.

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It is important to note that no single method is universally applicable, and the appropriate method will depend on the specific characteristics of the property and the market conditions. A real estate appraiser or professional with expertise in commercial real estate valuation can help determine the most appropriate method for valuing a particular property.

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Interested in a piece of commercial real estate and wondering about its value and price? Get in touch with a One Rock agent today.

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Where to Find Commercial Real Estate for Sale

 

There are resources that can help you find commercial real estate, but like all things, it takes work. Don’t expect the perfect deal to fall into your lap, and definitely don’t rush! I have a friend who quite often asks me to find him a deal. My conversations with him often go like this:

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“So, you want me to find you a good deal?” I ask.

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“Yes,” he responds.

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“If I find you the perfect deal tomorrow, are you ready to make a decision?” I ask.

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“Well, it depends on the deal,” he says.

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At this point, I know he’s not really ready to make a decision. Someone with their finances in order and their mind made up would say, “YES!” to the last question above.

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“My suggestion is that you get all of your finances lined up,” I advise. “ If you give me a year, and you are ready to pull the trigger, I can find you a good deal. If you give me two years, I can find you an AMAZING deal.”

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We believe you’ll find those amazing deals more easily working with a One Rock agent, but if you’d like to do some research yourself, here are a few of the most common resources:

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1. Commercial real estate brokers: Many commercial real estate brokers specialize in specific types of properties or geographic areas, and they can provide access to listings and assist with the buying process.

2. Online real estate portals: Websites like Crexi and Loopnet offer listings of commercial properties for sale and can be searched by location, property type, and other criteria. The most popular East Texas commercial real estate sites include:

   • LoopNet

   • Century 21 Commercial

   • Crexi

   • Property Shark

   • Texas Realtors

   • Land.com

   • ShowCase.com

   • Point2

   • Commercial Exchange

3. Social media: Professional networks like LinkedIn and industry-specific forums and groups can be a good source of information on commercial real estate opportunities.

4. Auctions: Commercial properties may be sold at auction, either online or in person. Auction sites and companies, such as Auction.com and Ten-X, offer a range of commercial properties for sale through auctions.

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It’s also a good idea to network with other professionals in the industry, such as appraisers, attorneys, and accountants, as they may have information on commercial real estate opportunities.

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Finding the right deal takes time and preparation. It also takes a willingness to look through hundreds of bad deals to find those few unique opportunities. Our agents at One Rock are willing to do exactly that. We believe we’re the right people to join you in this journey and highly encourage you to visit with us about your commercial real estate needs.  

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Get in touch!

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Should I Buy Commercial Real Estate?

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YES!

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One of my greatest regrets in life is that I didn’t start investing in commercial real estate sooner. There is no better way to generate true wealth. I didn’t live through the savings and loan crisis in the 1980s, and I don’t take huge risks as an individual investor. (I would have trouble sleeping and focusing on family life if I did!) However, there are plenty of lower-risk investment opportunities if you don’t rush, put in some hard work, and make sure you stick to your goals and objectives. 

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It’s also crucial to have a good team. I hope that’s where One Rock can come in. Give us a call. Let us be a part of your commercial real estate investing journey here in East Texas, and I promise you won’t regret it. We’re well-qualified to assist you in pursuing commercial real estate in Tyler, Longview, Lufkin, and beyond.

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Give us a call!

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None of the above should be construed as legal advice. When it comes to leases, agreements, and other legally binding documents, we always advise you to visit with an attorney. There are some great real estate attorneys who can help you close a deal, and many of them have reasonable rates.