When investing in commercial real estate, you will often hear or see the term “Value add” on specific assets. However, can you actually increase the value of your assets? Is it possible to create real value in CRE investments? The short answer is: yes. Below, we have included three tips to create value in commercial real estate assets.
Growing NOI is Necessary
NOI, or Net Operating Income, can create a dramatic increase in value. This can exist in the form of increased rental rates, increased occupancy, a decrease in operating expenses, or a combination of the three. In general, NOI is sensitive to three variables: occupancy, rental rates, and operating expenses. If you can make a change to one of more of these, you will increase the asset value.
Glaring deficiencies can be easily addressed, which allows the owner to lease it up. Understand the nature of your building and lease it out appropriately; if you have a floor with eight-foot-tall ceilings, it won’t attract tenants. If you don’t want to invest into fixing this situation, brainstorm tenants for whom this would not be an issue—those looking for storage and potential retailers. The key, here, is to understand the nuances of your building and how you can best capitalize on its features.
Maximize Your Location
Commercial real estate investments are stable in several ways–the most obvious regards location. You cannot move your building, but you can maximize its use in relationship to the location. Is it close to the highway? It might make a great office building. Near a city or shopping center? Fill it with commercial retailers. Does it have excellent views of the surrounding landscape? Think luxury offices or, if you’re willing to make the jump, condos.