Commercial Real Estate: Appreciation and Value Add

Commercial real estate, simply put, is any non-residential land or property meant to generate income or garner profit. Some examples of commercial real estate include industrial parks, hotels, office buildings, shopping centers, apartment buildings, parking garages and warehouses.

Although investment strategies for commercial real estate are fairly simple, many investors don’t fully understand how commercial real estate works as an investment vehicle. Commercial Investors typically make money in three ways: one, by purchasing or leasing the property and charging tenants rent in exchange for use of the property, two by appreciation in the value of the held property over time and three by brokering or negotiating a deal between a buyer and a seller of the commercial property. In this article, let’s examine the second of these commercial investment strategies a little more closely:

The opportunity for potential returns from a commercial real estate investment can come from appreciation over the period that the investor holds it and from value adding improvements. This unfortunately isn't always the case and even the best investors can still lose money despite their best efforts and most creative strategies. If demand increases for your property, or in the area right around your property, there’s a good chance that tenants will be willing to pay higher rent, and prospective buyers will be willing to pay a higher price than you paid originally to take it off your hands.

Appreciation based on supply and demand isn’t the only way a property's value can increase. Many investors take an active “value-add” approach to commercial real estate, making improvements to the property to increase its essential value or its ability to earn income. One example of this would be updating the amenities and improving cosmetic details of a multi-family apartment building. Updates such as these can allow the owner to charge higher rent for nicer apartments. Methods outside of improving the property might include rezoning an adjacent parcel of land, say from residential to multi-family, so that more apartments can be built. Any money spent to renovating a building can potentially boost the selling price of the building in the future.