Is that commercial property a good deal or a money pit? Questions you need to ask first

To buy or not to buy commercial space … it’s a question companies and CFOs wrestle with all the time. We predict savvy companies (and investors) will be keyed in on available real estate in the coming weeks and months.

Reason: Some deep-pocketed tenants are walking away from leases left and right in cities like San Francisco, Portland and New York. For example, Westfield announced it wouldn’t pay the remainder of a $558 million mortgage on its namesake San Francisco shopping mall. Foot traffic at the mall has plummeted since 2020 and its flagship store Nordstrom is moving out.

An estimated $1.5 trillion in commercial mortgages are coming due over the next three years. For many of these properties, the borrowers owe more than the sites are worth. Landlords will be desperate to sell, and suffice to say, some great bargains are sure to be on the market.

Three steps to consider before looking to buy

If your business is growing or looking to reduce taxes, you may already be mulling a move. And there’s always a better deal out there if you know where to look.

Just keep in mind that property owners who get behind on or barely make loan payments may skimp in other areas, especially maintenance and repairs. They’ll cut back on areas like cleaning, fixture improvements, security systems, energy efficiency upgrades, and so on.

All of these moves can detract from the building’s value. The asking price often won’t take into account improvements that should be made to a site, especially if it’s open to the general public.

Your best bets are to:

• Hire an independent building inspector or get your company’s facility manager to thoroughly check a property your company wants to buy or lease. Caveat: Some upgrades, like painting and carpeting, are no-brainers before moving in. But dented walls, worn-out carpeting, inefficient or inoperable plumbing fixtures, etc., will add to your costs.
• Factor in the previous tenant’s financial picture. There could be problems with the building not easily seen in a casual walkthrough. A facility manager should be able to help you make the call here. If you contract out building services/janitorial, hire someone who’ll tell you what you need to know first.
• Don’t overlook safety. Foot traffic is way down in cities where crime rates spiked following the George Floyd riots and Antifa mayhem. Believe it or not, only four out of 62 downtowns are busier than before the COVID pandemic started: Salt Lake City, Utah; Bakersfield and Fresno in California; and El Paso, Texas.