Commercial real estate investing is a highly competitive business. Investors constantly work to identify the best investment opportunities that can deliver reliable returns and create long-term wealth. However, the definition of success in commercial real estate investment is never static. It’s likely to change according to an individual investor’s needs and investment goals. For some, commercial properties with the highest rent rates provide the most lucrative investments. For others, the key to success lies in the highest occupancies.
We’re taking a look at what it means to succeed in commercial real estate investing, and what kind of key performance indicators (KPIs) can be used to measure that success.
Rising Occupancy Rates and Retention
There is no doubt that high occupancy rates are crucial for commercial real estate investors. A property’s occupancy rate represents the percentage of all available space that has been rented out. A high occupancy rate is an excellent KPI which reflects a successful investment, but it should be considered in comparison to the market average. An occupancy rate of over 95% can be considered a sign of a desirable investment, delivering stable income and lower vacancy risk.
Maintaining good tenant retention is essential to ensure a stable and profitable investment. Studies show that retaining existing tenants costs significantly less than finding new ones, and it creates a stable income stream for investors. A high tenant retention rate is a sign of a successful investment and reflects a better tenant relationship, which, in turn, leads to higher tenant satisfaction and referrals.
Consistent and Recurring Rental Income
Rental income is another significant performance indicator for commercial property owners. Rental income is the regular income received for the use of the space that investors provide to commercial tenants. The rental income helps investors calculate their returns on investment and how profitable every property is.
What you earn in rent will be affected by other factors, such as the quality of the property, its location, and tenants’ reliability. Therefore, investors should consistently evaluate their properties, raise rents when necessary, and make critical improvements to keep them profitable.
Analyzing Return on Investment (ROI) and Appreciation
Return on Investment (ROI) is a financial metric that quantifies the return on the investment made in a commercial property. ROI is generally expressed as a percentage and calculated as the net gain or loss of an investment relative to the initial investment. A high ROI represents a successful investment, and commercial real estate investors should aim to have a ROI of at least 10% to generate significant profits.
Appreciation is the increase in the value of a commercial property over time. This metric depends on factors such as market demand, location and the level of competition in the industry.
To effectively understand your success, it’s important to understand and track the critical performance indicators we have discussed. Investment success is not solely defined by rental income or occupancy rates. The key is to focus on a combination of performance indicators to make more informed decisions.
Continue evaluating your commercial properties and how they’re performing. If you’d like to talk more about how to measure success against your specific investment goals, please contact us at Preston-Lee Management Company. We’ve been providing commercial property management services in the High Desert for more than 30 years.