In a fluctuating economic environment, knowing which commercial real estate investments will be fruitful and which ones will be duds is more difficult than ever. Before signing on the dotted line for any potential commercial property, it’s best to do your due diligence to ensure you know exactly what kind of liability you’re taking on.
Below, 20 Forbes Business Council members share additional strategies business owners can leverage to minimize the risks associated with a commercial real estate investment.
1. Carry Out A Comprehensive Third-Party Audit
Get a clear view of risks with a comprehensive third-party audit, including energy, regulatory and climate assessments. Prioritize CapEx improvements based on the anticipated hold period and identified risks. Many of our clients invest in energy conservation, green certifications and compliance pathways to enhance financial and environmental performance, and this can also reduce operating costs and position the property as a differentiated asset. – Bradford Dockser, Green Generation Solutions, LLC
2. Make Conservative Price Calculations
Commercial real estate is usually the one that gets hit first during times of crisis. Hence the risk associated with such investments is always high compared to other real estate investments. To make sure you get an equally high ROI, calculate your rental and purchase price conservatively. – Mustafa Gandhi, Crystal Group
3. Avoid Overleveraging Your Commercial Investments
I’ve seen that too much reliance on debt can be risky, especially when interest rates rise or market conditions shift. High borrowing costs can erode profits and jeopardize project stability. Keeping leverage low and prioritizing projects with strong fundamentals and cash flow provides flexibility and long-term security in uncertain times. – Reza Esmaeili, Land Services Group
4. Limit Personal Guarantees
Avoid personal guarantees in commercial real estate deals. This will limit your personal liability and protect your assets if the market shifts. Focus on structuring deals where the property itself secures the loan. This approach reduces risk while giving you greater flexibility to navigate economic uncertainties. – Dr. Clemen Chiang, Spiking
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5. Explore Government Incentive Programs
Government incentives, such as tax credits, can be a valuable tool for mitigating risks and reducing the cost of commercial real estate investments. By researching available incentives, meeting eligibility requirements and seeking professional advice, business owners can take advantage of these benefits to improve their investment returns. – Sabeer Nelliparamban, Tyler Petroleum Inc
6. Develop Relationships With Local Planning Agencies
Build strong relationships with local planning authorities. By staying informed about zoning laws, future developments and market trends, you can make more strategic investment decisions. This proactive approach allows you to anticipate changes in the market and adapt your investment strategy accordingly, reducing the potential for unexpected challenges. – Raquel Gomes, Stafi
7. Get Involved In Community-Oriented Projects
One great way for business owners to reduce risks in commercial real estate investing is by getting involved in community-oriented projects in their investment areas. By building strong relationships with local businesses and residents, investors can boost property value and support the vibrancy of the neighborhood. – Michael Shribman, APS Global Partners Inc.
8. Keep Up With Investing Trends
Investing with the trend is key to risk mitigation. Allocate some investment to industrial real estate and hospitality, especially industrial real estate, as it aligns with U.S. policies supporting American manufacturing. With the growth of the IT and artificial intelligence industries, data centers and tech facilities are also good choices for commercial investment. – Janet Zhang, Boston Easy Biotech Inc.
9. Consider Shared Occupancy Agreements
Consider utilizing shared occupancy agreements where multiple businesses co-lease the same commercial space, sharing both the costs and risks. This not only diversifies revenue streams but also ensures steady cash flow. Even if one tenant faces difficulties, it provides a buffer against market downturns. – Chris Kille, EO Staff
10. Adopt Flexible Leases
In uncertain economic times, opting for flexible leases helps mitigate risk in commercial real estate. I prioritize shorter terms with options to expand or downsize, allowing quick adaptation to market changes. This approach reduces financial strain and boosts operational agility. – Michael Cassau, SKROL Capital Inc.
11. Do Your Due Diligence
Conduct due diligence. There is no substitute for undertaking thorough preparation and research in order to properly assess the risk and return of an investment. By doing this, an investor can consider, manage and mitigate risk as needed or walk away before it is too late. – Marian Evans, Elevate BC Ltd
12. Diversify Your Investment Portfolio
In a fluctuating economic landscape, business owners will find strength in diversification through a blend of retail, office, industrial and residential properties across varied locations. This strategy cushions against market volatility, as each sector reacts differently to economic shifts. Market research uncovers opportunities while flexible leases and vigilant cash flow provide essential safeguards. – Sahit Muja, Albanian Minerals
13. Allow Short-Term Leases And Break Clauses
One effective strategy is negotiating short-term leases or incorporating break clauses into lease agreements. This can also be applicable in remote work settings. From my experience with managing virtual teams, scaling or shifting office space as your workforce changes can reduce spending on significant resources and keep your options open for remote or hybrid setups. – Jason Miller, Strategic Advisor Board
14. Seek Mixed-Use Properties
One effective strategy I’ve seen work is to diversify your commercial real estate portfolio by investing in mixed-use properties. These properties can generate multiple revenue streams and provide a cushion against market volatility. From my experience, focusing on urban areas with strong growth potential and adaptable spaces mitigates risk and positions your investment for long-term appreciation. – Adhip Ray, WinSavvy
15. Vet Deal Sponsors
Vetting the deal management or sponsor is crucial for mitigating risks in commercial real estate. A strong sponsor with a proven track record can greatly influence success. Research their past projects and assess their communication style. Combining this careful selection with diversification enhances your investment’s resilience against market fluctuations and increases your chances of success. – Ryan Whitefield, Revilo Property Group
16. Maintain Conservative Cash Flow Assumptions
It is really the interest rates that have been problematic. If you are supposed to pay a certain regular amount to the lender for debt servicing based on an interest rate, you better have the right cash flow to ensure you are not paying more than what the property is actually earning. We are conservative with incoming cash flow assumptions, and if the Fed does cut rates, that greatly helps. – Zain Jaffer, Zain Ventures
17. Acquire A Diverse Tenant Base
To reduce risk in commercial real estate, diversify tenant types (e.g., retail, office, industrial) within a property. This balance can shield you if one sector faces challenges. Anchoring tenants with long-term leases also provides steady income and a buffer against volatility. Flexible lease terms can further support high occupancy. Nothing beats hard work and networking. – Atte Suominen, PADEL1969
18. Secure Long-Term Leases With Stable Tenants
One effective strategy is securing long-term leases with stable tenants, ideally those in recession-resistant industries like healthcare or essential retail. This ensures steady cash flow, even during economic downturns. In my experience, focusing on lease flexibility—like built-in rent escalation clauses—also helps hedge against inflation while maintaining tenant satisfaction. – Joel Li, EV.com
19. Have A Hedging Plan
In my experience, it has always benefited my firm to have a hedging strategy. As the real estate market’s capital gains are in flux, buying an equity market index like the S&P will allow you to take advantage of any growth and capital gains there. No matter how small or large of a business you run, hedge it with the broader market or a portfolio of companies specific to your business. – James Felton Keith, InclusionScore
20. Remain Flexible
You don’t have to be in real estate to know that in uncertain times, flexibility can be a gamechanger. In real estate, that might mean diversifying with short-term leases or shared spaces but the idea works the same way in any industry. The more ways you have to serve your market, the better you can handle changes and keep things steady. – S.W. Miliano, The Stone Register