Ask any private equity group, REIT, or family office – nine times out of 10, they’ll agree that Los Angeles is one of the nation’s most dynamic regions for commercial property investment. How one approaches this market is largely a matter of individual strategy. However, there are a few core factors that virtually all real estate investment companies consider before committing capital to commercial properties. By understanding these considerations, you can better position your assets and decisions to stay competitive in this often cutthroat market, no matter whether you’re a property owner, landlord, or prospective buyer.
(1.) Submarket Data Analysis
Often, one of the first factors real estate investment companies scrutinize before making moves on commercial properties is any data relating to the investment’s submarket. The Greater Los Angeles area is a big region. It’s no surprise that the performance of commercial properties in the Westside might be drastically different than that of a commercial enterprise in South Bay, Hollywood, or the San Fernando Valley. Submarket data deserving of careful consideration includes:
- Absorption rate
- Long-term stability
- Tenant demand
- Vacancy rate
Obviously, submarkets that show population growth, infrastructure improvements, and expansion of business clusters shoot to the top of the list.
(2.) Asset Classes
Asset classes are another crucial consideration when assessing property investment. We’ve talked on this blog about the consistently high demand for industrial properties in accommodating markets like Vernon, Commerce, and South Bay. This remains true thanks to the resilience of logistics and the consistent reliance on e-commerce. At the same time, real estate investment companies need to be more selective in response to the current economy. This means prioritizing property investment opportunities such as creative offices or buildings with strong repositioning potential in reliably favorable locations. Meanwhile, retail investments populated by lifestyle-driven tenants are becoming stronger choices in walkable neighborhoods with plenty of foot traffic. These examples highlight the diversity of opportunities and the variety of ways investors can assess risk and return.
(3.) Financial Performance and Possible Upgrades
Of course, savvy investors will need to look at a potential investment’s current performance figures while contemplating opportunities to add value. This means accounting for:
- Lease terms
- Net income
- Operating expenses
- Possible upgrades
- Tenant credit quality
Investors may also need to consider the impact of management improvements and strategic tenant restructuring. Los Angeles is a particularly hot city for repurposing or upgrading older commercial properties to meet modern standards. Therefore, value-add strategies are almost always in fashion among the city’s many real estate investment companies.
(4.) Zoning, Entitlement, and Repurposing
Blindly diving into a commercial investment without considering zoning ordinances is a fatal error. Some areas are more flexible than others when it comes to zoning, so it’s essential for real estate investment companies to do their homework before pulling the trigger. If expansion, redevelopment, or alternative use is part of the plan, investors should prioritize these areas with looser zoning restrictions or clear paths to entitlement. Evolving neighborhoods are often the safest bet for these investment strategies. Their favorability for adaptive reuse, mixed-use projects, and density bonuses can give investment companies a long-term advantage.
(5.) Regulations and Environmental Considerations
Zoning isn’t the only local regulation that real estate investment companies need to stay abreast of. The slew of regional and municipal considerations includes building codes, sustainability requirements, and seismic retrofitting standards. Everything from timelines to renovation costs hinges on a comprehensive understanding of these regulations. Depending on the long-term plan, environmental considerations may be on the table as well. For example, industrial sites may need to assess soil conditions. Older buildings will likely need to consider restrictions set in place by local historic preservation endeavors. These are just a couple of examples of how the environment can directly influence an investment’s financial possibilities.
(6.) Macroeconomic Conditions
Institutional real estate investment companies and those relying on debt strategies or portfolio balancing are particularly influenced by the conditions of the broader capital market. Therefore, it’s a good idea to also consider key macroeconomic factors such as:
- Financing flexibility
- General economic status
- Interest rates
Ultimately, these considerations can be used to inform an investor’s buying power and determine whether pursuing an acquisition is a smart move.
The Considerations of Savvy Real Estate Investment Companies
In a dynamic commercial market like LA’s, it pays for real estate investment companies to be selective. The factors we’ve discussed today help investors to properly prepare for the shifting commercial market and gauge whether a particular property is ultimately worth the risk. If you’d like a knowledgeable professional to help you sift through these considerations to ensure you fully understand a deal from every angle, reach out to one of our seasoned commercial experts today.
