The Pros and Cons of Investing in Commercial Real Estate

Florida has one of the largest and most dynamic commercial real estate markets in the entire country. As defined simply by the Corporate Finance Institute, commercial real estate is “non-residential immovable property used for business or land that can generate income.” There are a lot of commercial real estate investment opportunities available in South Florida. Is it the right time to invest? Here, our Fort Lauderdale commercial real estate attorney discusses the pros and cons of investing in commercial real estate in Florida. 

The Pros of Investing in Commercial Real Estate

Whether you are a first-time investor, ready to diversify from residential real estate, or looking to add to your portfolio, commercial real estate has the potential to be an excellent investment opportunity—especially for those with knowledge, experience, and or foresight to find the right property. Some advantages of investing in commercial real estate in South Florida include: 

• Undervalued Property May Appreciate Considerably: Florida’s commercial real estate market occasionally presents opportunities to purchase undervalued properties. These assets—which can be overlooked in favor of more prominent listings—can provide significant upside potential. Indeed, there are some commercial properties that will appreciate at far higher rates than the market as a whole. Savvy investors who can identify these hidden gems stand to gain as the market recognizes the true value of these properties.
• Commercial Properties Generate Income: One of the most compelling reasons to invest in commercial real estate is the potential for steady income generation. Commercial properties—from office buildings to retail spaces to industrial sites—can bring in higher rental income than residential properties. The income can provide a reliable cash flow—making it an attractive option for investors seeking a steady return on investment. 
• Potential Option for a Triple Net Lease: With a commercial property, a triple net lease (NNN) is a possibility. That is generally not the case with residential real estate. An NNN is a type of leasing structure that is particularly investor-friendly. It shifts most of the property expense responsibilities—property taxes, building maintenance, insurance costs, etc—to the tenant. The arrangement not only reduces the financial burden on the investor but also simplifies property management. Triple net leases are common in commercial real estate investments and can lead to more predictable income streams. 
• More Flexibility (Lease Terms, Property Use, etc): Finally, commercial real estate in Florida offers more flexibility compared to residential investments. The flexibility can be seen in the negotiation of lease terms, which can be tailored to suit the needs of both the investor and the tenant. Beyond that, commercial properties often have a variety of permissible uses, allowing investors to adapt the property to suit different tenants. There may even be options to redevelop a commercial space into a better use. 

The Cons of Investing in Commercial Real Estate 

Although commercial real estate offers considerable opportunity for investors in South Florida, it is certainly not the right option for everyone. There are downsides that could make the investment less desirable. Some potential drawbacks of investing in commercial real estate in Florida include: 

• Considerable Start-Up Capital Required: As a general rule, the start-up costs for commercial real estate investment are higher than the start-up costs for residential real estate investment. Indeed, one of the most significant barriers to entering the commercial real estate market is the substantial amount of capital required upfront. Unlike residential real estate, which may offer more accessible entry points, commercial properties typically demand higher purchase prices, down payments, and investment in terms of renovations or customization for tenants. The high initial cost can be a deterrent for some investors. 
• Time Commitment Can Be Significant: Commercial real estate is complicated. Managing commercial real estate is often more time-consuming and complex than managing residential properties. Often, commercial properties involve detailed negotiations over lease terms, ongoing management of tenant relationships, and adherence to more complex zoning and regulatory requirements. Beyond that, the process of finding suitable tenants who meet specific commercial criteria can be lengthy and require a more strategic approach. For investors not using a property management company, the time and effort can add up. 
• Greater Exposure to Market Down-Turns: Commercial real estate rents tend to be more “swingy” than residential real estate rents. It is not impossible for a particular type of commercial real estate to have a 30% or more vacancy rate in a specific market. That is far less common with residential real estate. When the market turns bad, even if only in one sector of the economy, it could hurt commercial real estate. It is a risk that investors need to be prepared for. Proper planning is essential. 
• Less Statutory Protection for Buyers (Transactions): In Florida, commercial real estate transactions often involve less statutory protection for buyers compared to residential real estate transactions. The assumption is that both parties in a commercial transaction possess a greater understanding of business and property dealings. As a consequence, novice investors are at a disadvantage. The complexity and scale of these transactions require strong due diligence. All commercial real estate purchase/investment agreements should be carefully reviewed by an experienced attorney. 

Commercial Real Estate Offers Investment Opportunities—But They are Not Right for Everyone

The current commercial real estate market in Florida offers opportunities that can yield substantial returns and diversify an investment portfolio. However, the significant initial capital requirement, coupled with the intensive management and potential economic sensitivity, make it less suitable for those without the necessary resources or risk tolerance. Do not go it alone: An experienced Florida commercial real estate attorney can help. 

Contact Our South Florida Commercial Real Estate Lawyer Today

At The Law Offices of Odelia Goldberg, our Florida real estate attorney has the skills and experience to represent buyers of commercial property. If you are considering investing in commercial real estate, we can help you navigate the legal process. Contact us today for a completely confidential, no-obligation initial consultation. From our Fort Lauderdale office, we provide legal representation in commercial real estate matters throughout Southeast Florida.