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Why Bigger is better than smaller when it comes to Commercial Real Estate deals

March 10, 2018
Why bigger is better? When it comes to commercial real estate deals bigger is always better whether you are investing in an office building, retail space or really any form of commercial real estate. We give you six reasons that prove that bigger is better when it comes to commercial real estate deals.

Less Risk:

When you invest in bigger properties, undoubtedly your profit will be larger and worth every penny you spent on the investment. For example, when you own a smaller commercial property like storefront in shopping center you may run the risk of losing money on the rent that make the business fail to thrive. With this you may be losing prestigious funds and time waiting on another business to rent the space, get up, revamp and running. On the other hand if you won the entire shopping center, you can have two or three businesses that suffer and die out. You won’t notice the loss of income quite as much in between renters as you are still receiving profits from the other renter. So, in this regard we can say that it is much better to have bigger than smaller properties.

Non-Recourse Lending:

Another benefactor area where commercial multifamily real estate is less risky than residential real estate is in lending. Because these bigger properties qualify for non-recourse lending that means, the bank cannot come after the owners should the properties fail. The bigger properties are safer than the smaller ones and if you dig into the data on default rates, one can easily see that commercial multifamily GSE conforming loans have a historical track record of default that is sub 1%. Currently, these same loans are under 0.5%. With such minuscule foreclosure rates is it any wonder why banks don’t need owners to personally guarantee these loans?

When you invest in bigger properties, you can divide your responsibilities:

The larger properties comes with the advantage of hiring commercial property management teams to control your properties, allowing more time for you to continue investing and building your profits elsewhere. In order to divide the responsibilities you can hire the best in the business that you can trust to manage your properties to keep them running smoothly and the values continuously increasing.

Your property value is not based off of the properties around you:

It is better to own bigger properties because unlike residential property, the value of your property is strictly determined by your operating income in spite of how your neighbors are faring. This means that the property down the street being foreclosed on or failing miserably will not have any kind of bad effect on your property value. This is an additional bonus for commercial real estate investors who know what they are doing. You can ensure that your property will be valued at top dollar by investing in bigger properties, raising your rent, decreasing your spending and by using other strategies etc.

Ability to scale:

Bigger properties typically qualify for non-recourse debt and have no such limits on the number of loans that can be obtained. So, successful commercial real estate investors can scale their business in such a way that they can buy more properties and make more money.

Professional property management:

Residential property management is more expensive and tends to be more mom and pop as compared to Commercial property. Moreover commercial multifamily has the scale that can afford them access to professional property management. With all these valid reasons we can say that bigger is much much better than smaller when it comes to commercial real estate deals.