Obtaining accurate and useful information about something like commercial real estate investing isn’t easy. Unfortunately, the internet is awash with articles that provide misleading and even downright inaccurate advice, so relying on such information is risky. A better way to start learning about commercial real estate investing is by connecting with a proven leader in the field. To that end, you would be hard-pressed to do better than Christopher Linkas. With more than 25 years of experience in finance and investing—commercial real estate investing, specifically—Linkas is a solid source to turn to for advice and guidance regarding this high-risk, high-reward form of investing.
Commercial Real Estate: The Basics
When he graduated from Bowdoin College in 1991, Christopher Linkas immediately launched his career in finance. Well before then, however, the ambitious young man had already learned a great deal about commercial real estate. Everyone has to start somewhere, and it pays to learn the fundamentals before even attempting to break into this type of investing. To that end, here is a quick overview regarding commercial real estate.
By definition, commercial real estate is property that is used exclusively for business purposes. Typically, commercial real estate space is owned by investors and then leased out to businesses for use as workspace. At the time that Christopher Linkas entered the business world, the economy was in turmoil. In the wake of the Savings and Loan scandal, investors were running scared. Although it was a difficult time to enter the investment fray, Linkas has said that it made him into a better investor.
Real estate, in general, falls into three broad categories: residential, commercial and industrial. Many people erroneously lump commercial and industrial real estate together, but the two are distinct entities. Industrial space is exclusively used for manufacturing and production, and it doesn’t tend to attract investors the way that commercial real estate does. Christopher Linkas has never been involved in industrial real estate to any significant extent, but he could certainly apply his extensive knowledge of commercial real estate to that sector and do well with whatever ventures he pursued.
It is pretty rare for a business to outright own the building that it uses. More commonly, the business leases space from the building, which is typically owned by an investor, or a group of investors. These investors are responsible for ensuring that the building is properly maintained, and they must find tenants and keep the building as occupied as possible to generate the most income. Put simply, this type of investing is a full-time job, which is evidenced by the career of Christopher Linkas. He got an initial taste for the work immediately after college, in the early 1990s, when loans were being offered at competitively low rates in the hopes of stimulating the economy.
Commercial Real Estate Classifications
Commercial properties fall into three classifications, which reflect their quality and value. While most new investors are quick to zero in on the top classifications of commercial real estate, experienced investors like Christopher Linkas know that opportunities abound across all classifications.
The classifications for commercial real estate are:
- Class A – A building that is classified as Class A is the crème de la crème. This type of building is typically centrally located; in a major city, then, it would be found in a major business district downtown. Typically, it is close to public transportation and major freeways. Buildings like these boast excellent aesthetics, and no work should be required to make them presentable. They are usually fairly new—most have been built within the last five to 10 years—and their infrastructure is sound.
- Class B – Many Class B buildings were once Class A properties that have simply degraded a bit through the years. Indeed, without being fairly new, it is difficult for a property to fall into the Class A category. Class B properties are nice alternatives for businesses that can’t afford the typically steep lease rates that go along with Class A buildings. Investors like Christopher Linkas know that these properties offer a nice middle ground for both tenants and investors.
- Class C – While some would argue that Class C properties aren’t worth investors’ while, the truth is that many businesses rely on them for their affordability. Lease rates tend to be lowest for this classification, and turnover can be high because newer or less stable businesses are typically drawn to them. These properties are usually a bit off of the beaten path, so they aren’t ideal for companies that rely on foot traffic. Class C buildings are usually at least 20 years old, and they typically require a great deal of maintenance.
Commercial Lease Types
To understand the considerable benefits of investing in commercial real estate, which Christopher Linkas knows well thanks to his experience in the finance industry, it helps to know the basics of how commercial leases work. Following college, Linkas landed a job with a consulting firm that specialized in repackaged loans. This was immediately followed by jobs in the investment and credit world out of New York. During these years, Christopher Linkas became well-acquainted not only with commercial loans but with commercial leases, and this knowledge has benefited him enormously throughout his career.
Commercial real estate leases typically have terms ranging from one to 10 years; office and retail properties typically sign leases for five to 10 years. In most cases, the larger the tenant, the longer the lease. This is because large companies are well-established and usually know what they will need for the foreseeable future while smaller companies are often newer, still growing and unsure about where they will be even a year or two down the line.
Here is a quick rundown of the most common commercial leases:
- Gross lease – With this type of lease, the tenant is only responsible for paying rent. All of the other costs that are associated with the property, including property taxes, insurance and maintenance, are covered by the landlord. Needless to say, this type of lease is great for tenants and not as lucrative for investors.
- Single-net lease – A tenant is responsible for rent and property taxes under this type of commercial real estate lease, which is also referred to as an N lease.
- Double-net lease – Also known as a NN lease, a double-net lease is one in which the tenant is responsible for rent, property taxes and insurance. The landlord covers maintenance costs.
- Triple-net lease – This type of commercial lease, known also as a NNN lease, is one in which the tenant is responsible for rent, property taxes, insurance and maintenance costs. An investor like Christopher Linkas would likely agree that this type of lease is optimal for investors because they tend to be more profitable.
Outlook for Commercial Real Estate in 2018
After several years of strong growth, it appears that commercial real estate markets across the U.S. are beginning to cool down. One might think that this would cause grave concern for Christopher Linkas and other experienced investors, but the truth is that someone like Linkas is savvy enough to find opportunities anywhere. Indeed, during his time working out of New York, Christopher Linkas focused on categories like opportunistic debt, so he knows how to turn a seemingly bad deal into one that is solid gold. This is yet another reason why it pays to heed advice from someone with his extensive background.
The commercial real estate market took a huge hit during the recession of 2008 to 2009. Starting in 2010, however, commercial real estate across the country started to rebound. For many years after that time, in fact, the market experienced annual gains. However, it appears now that the trend has peaked and is now on the downslide. For example, in December 2018, commercial real estate prices were down for an eighth consecutive month. Meanwhile, sales volume growth has stalled since 2016. Starting in 2017 and into 2018, there have been widespread store closings largely due to the continued growth of online retail.
With all of that being said, most experts, including Christopher Linkas, agree that the overall commercial real estate market is healthy. There are many positive aspects still, including strong growth in suburban markets and consistent gains in the office property sector. As the current head of European credit for a UK-based investment firm—a role that he has held since 2012—Christopher Linkas continues to focus on opportunistic investments. They span many categories, including leases, non-performing loans, secondary LP interests, shipping and renewables.
Investing in Commercial Real Estate
Don’t be scared away by the fact that the commercial real estate market has cooled down a bit. There are many benefits associated with investing in this type of property. In particular, doing so can be very profitable; it also serves as a solid hedge against the often volatile stock market. If you don’t have the pedigree of someone like Christopher Linkas, though, how are you supposed to break into this type of investing?
There are two primary ways in which to make money with commercial real estate as an investor. You can buy a property outright, wait for it to appreciate in value and then sell it when the time is right to turn a nice profit. It is far more common, however, for investors to buy properties and to then generate ongoing income through rent. Christopher Linkas undoubtedly has experience in both areas, but his focus has long been more global than that. In his current role for a 20-person investment group out of London, Linkas is responsible for opportunistic investments in the UK and European regions.
When buying commercial real estate, most investors buy the entire property. However, to see returns more quickly, some opt to piece out the properties that they purchase. It can be confusing to decide which option makes more sense, and this is why it often pays to work with an established and respected commercial real estate company. Such companies essentially cover all of an investor’s needs by offering an extensive lineup of services, which typically include the following:
- managing the upkeep of clients’ properties
- advising clients on how to negotiate lease agreements that attract and retain tenants
- helping clients to navigate various financing options
- appraising the value of commercial real estate properties
- helping to source viable commercial real estate for clients
Advantages of Investing in Commercial Real Estate
As the European head of credit for a London-based investment group, Christopher Linkas has gained even more perspective about commercial real estate on a global scale. He, therefore, knows precisely the best advantages of investing in these types of properties. One of the top advantages concerns lease rates, which tend to be more lucrative for investors. That is especially true in areas that are experiencing low vacancy rates and that have little space for new development. Another advantage of investing in this type of real estate is the longer lease contracts that are typically used. These long-term tenants provide stable cash flow for investors, which is often hard to come by.
Disadvantages of Investing in Commercial Real Estate
One of the biggest drawbacks of investing in commercial real estate is having to navigate the many confusing rules and regulations that apply to the industry. These regulations can vary by county, state, municipality, industry, size and even zoning, which adds to the confusion. You either must possess specialized knowledge of these topics, like Christopher Linkas and other experienced investors do, or you must be able to afford to hire people who do. There is also more risk associated with high turnover of tenants. Unlike with residential properties, commercial space must be customized to suit each tenant. Any time a tenant leaves, the space must usually be reconfigured—and that typically costs a lot of money.
Who Makes an Ideal Commercial Real Estate Investor?
Although you don’t necessarily need to have the impressive pedigree and resume of someone like Christopher Linkas to be successful with commercial real estate investing, you should meet certain criteria. If you own a business, you might seriously consider buying space rather than renting it. If you are strictly going to be an investor, however, here are a few of the traits that are commonly shared among people in that group:
- Sophistication – If you are already a seasoned investor and want a challenge, commercial real estate is a viable option to pursue.
- Time and money – You need to have ample supplies of both to be successful in this area of investing.
- High net worth – Most successful commercial property investors are high net worth individuals because the costs associated with such investments are considerable.
The Problem with Investing Directly
Like many who are interested in breaking into commercial real estate investing, you may be eager to start investing directly—in the same manner that seasoned investors like Christopher Linkas do. You can easily peruse commercial listings that are published by commercial real estate firms like CBRE, but be prepared to put down a hefty down payment. In most cases, a down payment of 30 percent or higher is required. You must also be prepared to manage the property that you purchase, which includes upkeep; finding and retaining tenants and negotiating lease contracts. Since so much is involved—and since many investors have full-time jobs and are just wanting to invest on the side—real estate investment trusts, or REITs, are often more practical options.
Indirectly Investing in Commercial Real Estate
Fortunately, you don’t necessarily have to buy commercial properties and then manage them to make good money as an investor. Professionals like Christopher Linkas have a lot of advice for those who would rather invest their money but not necessarily their time and attention, which tend to be in limited supply. Real estate investment trusts, or REITs, are portfolios of commercial properties that are publicly traded and therefore easy to buy and sell. Since they provide so much more liquidity, they make a lot more sense for individual investors who lack the cash, time or knowledge that are required to successfully own and manage commercial real estate.
With REITs, managers handle all aspects of managing the properties themselves. You don’t have to worry about maintenance, procuring and retaining tenants, negotiating leases or any of those other concerns. With special tax considerations, these investment vehicles offer high yields, and they are capable of providing income, capital appreciation or both. Bowdoin College graduate Christopher Linkas understands the finer nuances of making money with commercial real estate, so it is wise to seek out people with his level of experience for guidance regarding these matters. In short, if at all possible, hire a skilled financial professional to assist you in laying the groundwork for your commercial property investing endeavors. It will save you a lot of time and effort, and it will increase your odds of generating strong profits more quickly.
REITs are the most popular options for commercial property investors, but they’re not the only ones. Index-based products like ETFs, or exchange-traded funds, track REIT and property benchmarks to provide diversified portfolios of REITs for investors of many skill and experience levels. Commercial mortgage-backed securities, or CMBs, are interest-paying bonds that hold groups of commercial mortgages, and these are also viable options to consider.
Knowing what you do now about commercial real estate investing, you should be ready to take the next step. Although you aren’t likely to become the next Christopher Linkas overnight, you should be able to find your footing with time, persistence and effort—especially if the commercial market picks up steam again, which it could at any time.