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The Future of Small Commercial Real Estate

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Created on Friday, May 12, 2017
Updated on Monday, February 26, 2018
by Land Century

Commercial real estate is normally a prime investment because it allows you to own a very valuable piece of land. Investors that gobble up commercial real estate have the option to simply buy land and hold onto it until a wealthy company comes along and offers a premium for the property because it could be used to boost their own sales. And if buildings exist on this small commercial real estate, they can be rented out or sold for much higher than you would be able to demand from residential real estate.

The main factor behind commercial real estate being so expensive is that not only is the property designated for commercial usage, but the real estate is often in a highly trafficked area. Small shopping plazas or malls do so well because of all the people that flock to the area. People may come to buy a pair of shoes, but they’ll window shop or buy a slice of pizza from nearby businesses. And all of the businesses on these lots benefit as a result, leading to more customers and higher profits.

But you don’t need to invest in only high-end commercial real estate – small commercial real estate is doing well, too.

What does the future hold for these properties?

Only time will tell, but we can try and make predictions to be able to tell just how well these properties will perform in the future.

Inventory Levels Will Remain Low

Commercial real estate completion hit a low in 2011 and actually fell into negative territory. In 2013, these numbers were still abysmal. The height of completion was in 1989, and there has been an uptick every 10 years or so, with the last high in 2007.

Since then, completions have fallen dramatically.

Going off of data from 1989 to present, it’s easy to predict that we’ll start seeing an uptick in construction completions for new commercial real estate. But the problem is this: there is little reason for developers to finish these projects.

Market rents are not high enough to justify new construction, leading to low inventory. And this is good for investors to some extent. New properties will be occupied quickly, and current properties are likely to increase their rates. With less inventory available, commercial real estate’s value will boom as a result.

Small Commercial Real Estate Will Boom

It may not seem apparent just yet, but the time of America’s big shopping malls is starting to become a thing of the past. People have a tendency to shop online, and if these people aren’t shopping online, they’re not filling shopping malls like they once did.

Just look at J.C. Penny and Sears – the two mega stores known to be in almost every big mall in the United States. Both of these companies have struggled dramatically in the last 10 years, with a lot of stores closings in the process. Consumers are going to smaller locations or shopping online to try and beat the crowds at malls.

All of this is a good thing for small commercial real estate because it’s less expensive to invest in smaller properties than a shopping mall, and people like smaller outlets much better than the gigantic outlets of the past. This will lead to a boom in smaller real estate, which is welcomed by the smaller investor.

Online Shopping Concerns Will Rise

People still head to Walmart and Target, but there is no denying that the Internet has changed the way people shop. Everyone is using the internet for everything from the clothes we buy to purchasing food, making travel arrangements, doing taxes and even buying real estate.

The Internet is only going to continue to increase in popularity and preference as it becomes more accessible than ever before. And this needs to be a concern for small commercial property owners.

Don’t misunderstand, there will always be a demand for real estate in the commercial sector. People will always prefer to go to a brick and mortar store for some items. But many small businesses are also finding that an online presence is all they need to begin their operations.

So, if the trend of people buying goods online continues to grow, we may find that there is a lack of demand for commercial real estate.

This is more of a long-term forecast, and it’s obviously something that may not come to fruition. The one good thing is that service businesses will likely maintain their brick and mortar operations. And since these businesses are often small, it leaves a lot of opportunity open to the small investor.

Professionals that will remain in brick and mortar businesses are:

• Lawyers
• Doctors
• Chiropractors
• Accountants

And specialty stores will remain in their shops, too.

Shift to an Aging Population

The population is aging – it’s no secret. And with an aging population, this also ushers in a new form of retail where younger shoppers go to order products on their smartphones before stepping foot in a store.

People aging will become a major problem, but it will also shift to a high demand for pharmacies and smaller stores. Expect to see pharmacies and other stores geared towards the aging population springing up. Small shops will be in high demand, so smaller real estate owners will find that they’re renting to a whole new group of people.

Shift to Co-working Spaces

Co-working spaces are on the rise. These spaces allow people to rent out small office units on a daily, weekly or monthly basis, or you simply get a small space to call your own without having an office. This is a neat idea for entrepreneurs and small commercial building owners.

Freelancers and the number of people that work from home are on the rise, and being able to work from a semi-traditional office allows people to maintain focus, too. This may even cut into big warehouses and offices as businesses try to find ways to curb expenses. A shift to co-working spaces is definitely something to look for in the next 5 to 10 years.

This will cause a major shift in the smaller commercial market.
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